The music started at 2 a.m. After over an hour of staring at the ceiling, seething with anger, it stopped. The next night it started again, blaring rap beats that didn’t end for several hours. The third night, I finally realized it was my neighbor’s car radio on the fritz and immediately walked next door to share some choice words.
This incident was one of 4,597. (Ok, just a guess, but it certainly felt that way.) There were parties and domestic scuffles several times a week, and our walls were so thin you could hear a pin drop (or, unfortunately, a baby cry) at all hours of the day or night.
The part of town was bad, the neighbors were worse, and we were dealing with an infestation of miller moths on the regular. But the FBI raid due to the criminal activity of our neighbors was the final straw. (Really.) So I packed my things and committed to making rent one of my spending priorities.
Fast forward five years. I was living on my own, sans roommates, for the first time in my life. I had selected an apartment that was technically outside of my original budget but came with the security and additional amenities that actually made the space feel like home.
Guilt was a regular visitor.
Paying my bills wasn’t a problem, but I still wondered if I was making a poor financial choice by spending so much on rent. Whether you have similar fears, or you’re in the process of selecting a rental, below are a few things I considered.
But before we get started, keep this in mind:
- Personal finance is personal. While rules of thumb exist, they aren’t prescriptions and they might not work for your specific situation.
- Spending should be indicative of priorities. Look at these tips through the lens of priority and you’ll likely come to the best conclusion for you.
Percentage of Pay
Rent is one piece of the expense puzzle. It’s probably a larger piece than most, but it must fit together with everything else to build the full picture (your income). While one person can easily afford $4,000 on rent, another might be stretched thin with $800. That’s why it’s helpful to think in percentages.
A common rule of thumb is to spend no more than 25% of your gross income on rent, or no more than 30% on rent + other house-related expenses like:
This would mean someone earning $5,000 per month should cap their rent at $1,250 and total house-related spending at $1,500.
While maintaining this percentage can keep your own spending in check, it might be a requirement for rental approval as well.
Renting an apartment in New York City requires, on average, an annual gross income 40-50x the cost of rent. So if rent is $2,500 per month, you would need to earn $100,000 - $125,000 annually. If you plan to have roommates, this minimum income requirement could be met together.
Meeting qualification requirements is a necessity, but examining the percentage spent on rent in terms of your own financial picture is just as important.
Rent vs. Other Spending
Aside from landing a better paying job before looking for an apartment, there was another key financial factor that made me feel comfortable signing the lease for my pricey new digs: I had no debt.
I owned my car outright, managed to get through school unscathed by student loan debt, and paid off my credit card like clockwork each month. If I needed to pay each of these additional monthly bills, I would have never felt comfortable spending 25-30% of my income on rent - even if “experts” told me I could.
This is where priorities and individual circumstances might trump rules of thumb.
Someone else in an identical financial situation could decide extra budget breathing room should be used for travel, not rent. Another person with student loans might decide paying off debt quickly is a much bigger priority than living in a pricier apartment.
This is what I looked at:
- What does my other spending look like? If I maintained this spending as is, could I still comfortably afford this apartment?
- Are there areas I’m spending that would be cut in order to better support this spending priority?
- Will I eventually be resentful of this expense? Or will it still be a spending priority six months to a year from now?
The State of Your Savings Health
Regardless of whether I was living at home or on my own, working in a low-paying job or a high-paying job, my financial non-negotiable was always to maintain a high savings rate. If I slipped and started saving less, that would indicate a need to reconsider how I was allocating funds.
So, with debt off the table, the other thing I was careful to consider was the amount I would be able to put towards saving goals after house-related expenses were paid.
Here are a few areas to look at:
There’s nothing worse than signing a lease only to find out a few weeks later you’ve been laid off from your job. Instead of waiting for an eviction notice, an emergency fund can help you bridge the gap between your last paycheck and your next job.
Maybe job security isn’t something you’re worried about. But if your savings is empty and every available penny is going to living expenses, a simple car repair could send you over the edge. Make sure you have a cushion to either pay for unexpected expenses as they arise, or put extra money away to prepare for when they do. (Because they will come up. Guaranteed.)
Short-Term and Mid-Term Goals
Saving is a proactive way to prevent yourself from becoming stuck. Savings allows you to check off boxes on your travel bucket list. Savings makes it possible to quit your job and pursue self-employment. Savings creates steps to a higher place whereas everyday income can usually only create a straight path.
Knowing this to be true, I never want voluntary expenses to make me feel stuck. A nice apartment without roommates is a voluntary expense when I can easily get by with less comfortable accommodations.
So before I agreed to the lease terms, I mapped out my spending and determined the savings rate I would be able to maintain if I opted for the nicer apartment.
- Will you still be able to stick to savings timelines you’ve established? (And if you haven’t established any, now is the time to set them.)
- Would putting more to saving for specific goals be more meaningful in the long run than spending more on rent?
Paying for a better living situation today sounds so much better than putting money away for a better retirement scenario later. I still feel this way even after being educated on the power of compound interest and saving early. So I take willpower out of the equation.While a landlord was looking at my gross income, I was considering my net income minus the retirement savings my employer was already taking out each month. This meant 12% of my pre-tax pay was off the table. (Ouch.)
It might lower what you can afford, but your future self will thank you.
Can You Live Comfortably?
When we were fresh out of high school, my then-boyfriend was approved for a brand new truck. He had less than reliable paychecks and credit that was nonexistent at best - but somehow he was offered a loan requiring monthly payments of one-third of his income. To say it crowded out other necessary spending is an understatement.
Bottom line? Getting approved doesn’t necessarily mean it’s a smart financial move. A bank or landlord isn’t in the business of protecting you from making decisions that might put you in a financial bind. That’s entirely up to you.
So when it comes to deciding how much is too much to spend on rent, it boils down to one question.
Can I afford to pay my rent and live comfortably while still:
- paying other bills
- maintaining a debt-payoff plan
If paying rent crowds out these any of these three areas, or makes you feel stretched thin and financially stressed every month, then you may want to think twice before signing the lease. The other option, of course, is to find a roommate (or additional roommates) to help shoulder the cost.
Finding An Apartment I Could Afford - and That Met My Needs
After running the numbers and realizing I could still maintain my savings goals and live in an apartment building that didn’t require regular FBI raids, I stopped thinking about the cost of rent. I was supporting a spending priority because the state of my finances allowed me to.
By taking a careful look at your financial situation - what it can handle and what you feel comfortable taking on - you will be able to determine what works perfectly for you. And that’s all that matters.