Of course, everyone wants to rent the nicest place they can afford, but budgeting properly is a bit more involved than that. How much should you actually budget for your monthly rent, also taking into consideration other expenses when you move in.
Budgeting for your rent is as important as other monthly expenses. Above items like child care, groceries, car payments, and utilities, and cell phone bills, it's likely the largest monthly amount you have to pony up. So, it's vital for you to plan well, otherwise, you'll find yourself in dire financial straits. If you think you're paying too much for rent, moving to more affordable accommodations can make a significant difference in your budget. Do some calculations before you commit to a new lease so you know what you can reasonably afford.
Income vs. Expenses
Just like a monthly mortgage and home buying, you should strive to keep your monthly rent below a specific percentage of your monthly earnings. The general rule of wisdom is no more than 25% of your gross (before taxes) income should be spent on rent. This means, you should not factor in other expenses like utilities. For example, if you make $4,000 per month pre-tax, your monthly rent should not exceed $1,000. That's a good number to stick with, otherwise, you'll find yourself going into debt to cover your other expenses like utilities, food, entertainment, gas, etc.
Some renters don't even budget things and just have a number in their heads. "I can pay $1,500 a month," they think, without even crunching the numbers. In fact, everyone should have a monthly budget they stick with, and by no means should you sign a lease without knowing your monthly expenses vs. your monthly income. If you create a solid budget, and you stick with it, you'll find yourself with money in savings instead of just living paycheck to paycheck. Here's a great budgeting tool to get started.
Home Expenses Aside From Rent
So, what about home-related expenses that aren't rent? The list is longer than you think, so don't plan on spending the rest of your paycheck without knowing what your remaining major expenses are. Factor in the following items as a starting point.
- Utilities: electricity, gas, water
- Communications: telephone landline, mobile phone, internet
- Insurance: renter's insurance, automobile insurance, life insurance
If you want to figure percentage, you shouldn't spend more than about 35% of your monthly gross income on home-related expenses plus rent. While this might not include auto insurance and life insurance, the things directly associated with your home should be factored in. If you follow these numbers and strive not to exceed them every month, it will help you manage your finances well, and it's especially important that your monthly rent number stays within budget.
Additional Budget Line Items
Keep in mind that you should be able to customize your budget based on your personal financial situation. If you don't have a car payment because you purchased it in cash or you've paid off your loan, you can allocate some of that toward other monthly expenses (rent, groceries, entertainment), but make sure you don't overdo it or fail to save. If you used to pay $500 for your monthly car payment, consider allocating some of that toward rent and some to savings.
In terms of following a percentage rule of thumb, your food (groceries, dining out), rent (including renter's insurance, utilities), and transportation (car payment, car insurance, public transportation, ride-sharing) exceed 60% of your monthly gross income, that's getting risky. If you can manage to keep these items in check, you'll be well on your way to keeping to a good budget every month.