How Much To Spend on Rent [The Ideal Rent-to-Income Ratio]

What is the 30 percent rule?

The rule stems from the Brooke Amendment, a 1969 U.S. Housing and Urban Development Act that capped rent in public housing projects at 25 percent of a tenant’s income. The cap increased to 30 percent in 1981. The idea that you shouldn’t spend more than 30 percent of your income on rent stuck, and the “rule” was born.

The rule also became a mantra for homebuyers seeking mortgages. Many lenders use a 28 percent housing expense-to-income and a 36 percent housing expense plus debt-to-income ratio for mortgage qualification.

Also, when landlords consider a renter’s application, they typically want to see that your gross income is three times the rent amount.

Following the 30 percent rule for rent would mean that if your gross income is $42,000, you shouldn’t pay more than $1,050 a month. But what if you’re in San Francisco? That wouldn’t get you a spot in a dresser drawer in that city, where the average monthly rent for a one-bedroom apartment is $3,137. Your gross annual income would need to hit $125,480 if you were following the rule.

There are other factors to consider and other ways to look at how much money to spend on rent.

Why the 30 percent rule isn’t always accurate

The reason why this equation doesn’t work today is that it doesn’t take into account modern expenses that go beyond the basic costs of living. The 30 percent rule does not factor in:

  • The need to pay down debt
  • The amount of money you’re left with after taxes
  • Saving for retirement or simply putting away a little each month in general
  • The huge variations in what people can do for a living
  • The huge variations in where people want to live

If you’re young and single and want to live in the center of a city, you’re going to pay more for that luxury. The same is true for families who want a home near the best schools in the area.

Simultaneously, your monthly expenses will vary a lot if you have to include childcare among everything else. Even owning a dog changes the game when it comes to your monthly budget, having to factor in pet rent and doggie daycare.

How much to spend on rent has become more personal than when the 30 percent rule came into being, and we need to look at budgets from that perspective. A one-size-fits-all plan is no longer going to work.

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The bottom line: determine what monthly rent works for your budget

When determining how much you should spend on rent, consider your monthly income and expenses. You should spend 30% of your monthly income on rent at maximum, and should consider all the factors involved in your budget, including additional rental costs like renter’s insurance or your initial security deposit. To find a rent price that works for you, figure out what you can afford and how much money you want to save. Once you find the right rent price, you can focus on putting more money in a savings account to meet your long-term goals.

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Your Rent Allowance

Subtract your monthly budget total from your monthly take-home pay, and the amount left is the most you should pay for rent—what you can realistically afford. If the amount is too small for available apartments in your area, take a hard look at your discretionary spending first and other categories as needed.

You may also need to weigh the options of moving to a less expensive locale or sharing an apartment with roommates. In many communities, a salary of $50,000 may not stretch too far, especially if you have student loans to pay off.

Consider the 50/30/20 Rule

Since the economy has changed over the past 40 years, it makes sense that the guiding principles for how you should manage your money should change as well. Instead of using the 30% rule as a static guideline for how much you should pay in rent, we recommend you consider the 50/30/20 rule.

This rule breaks down your finances into three categories:

  1. 50% Needs: This percentage encompasses all of life’s necessities, such as rent, electricity, car insurance, prescription medication, and groceries. You should also include minimum debt payments — whether student loan or credit card payments — as those will severely impact your credit score if you don’t pay on time each month. So instead of dictating that a percent of income go to rent, this budget rule combines your housing with all other mandatory expenses.
  2. 30% Wants: This is the fun category of non-essential items, and includes things like shopping, dining out, and hobbies — within reason. Basically, the things you enjoy but that are not a necessary for day-to-day survival, such as unlimited texting or your cable bill. You should also include saving for wants like vacations or cars in this category as well.
  3. 20% Savings: While the wants category allows you to enjoy the present, the savings category will set you up for a more secure future. The 50/30/20 rule suggests you put 20% of your take home pay toward repaying debts (above any necessary minimum payment on a credit card, mortgage, or student loan), an emergency fund, and saving for future long-term financial goals.

How to calculate 30% of your available income for rent

To find your gross monthly income, take a look at your most recent paycheck and find the line calling out “Gross Pay” (what you’re paid before taxes, health insurance, 401k, and any other benefits are removed from your pay).

Calculate your monthly Gross Pay

If you receive a paycheck every two weeks: Multiply your Gross Pay by 26 (to see your 52-week Gross Pay) then divide that number by 12 (to see your monthly Gross Pay).

If you receive a paycheck twice a month: Multiply your Gross Pay by 2 (to see your monthly Gross Pay).

Does 30% work for you?

If 30% of your Gross Pay is more than you’re currently paying each month in rent, then you’re at a safe level for housing. If 30% of your Gross Pay is less than your monthly rent, many financial professionals would suggest that you find a more affordable home or increase your income.

Ultimately, your level of comfort may also depend on how much is currently withheld from your paycheck: adjusting your 401k or opting for lower levels of insurance may give you the cash you need. However, if you have a medical emergency, that could end up costing a lot more if you have to pay out of pocket. If you’re well below the 30% recommendation for monthly rent but still find yourself living paycheck-to-paycheck, you may want to reexamine your entire budget to understand where you can cut out expenses.

In the end, the 30% recommendation is a best practice, but it may not be exact and will depend largely on your income and where you choose to live. By using the 30% standard, you can better understand if your current home is sapping too much of your income, if you can afford to move to a more convenient neighborhood, or if you can upgrade to your dream location.

Rent trends in the U.S

Now that you have a better idea of how much you should be spending on rent based on your gross income and the 30% rule, it can help to understand rent trends across the country.

Median rental list prices stood at $1,477 in April 2019 — up 2.6% from that time last year, according to the Zillow Rent Index. In fact, Zillow’s data shows that rent prices in the U.S. have generally been on the rise since 2012 for studio, one-bedroom and two-bedroom apartments.

Image: Chart showing median monthly rental list prImage: Chart showing median monthly rental list prices
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The Solution: 50/30/20 Budget

While the 30% rule has worked in the past it’s not as realistic with rising rent costs and unmatched income.

The solution is the .

Here’s how the percentages break down:

  • 50% for essential expenses
    • Housing
    • Utilities
    • Transportation
    • Groceries
    • Other items that don’t vary on a monthly basis
  • 30% for optional expenses
    • Entertainment
    • Dining, takeout and food delivery
    • Gym membership
    • Online shopping
    • Self-care
  • 20% for financial goals
    • Extra debt payments
    • Long-term savings
    • Retirement plan contributions (above the 401k match)
    • Saving for a house down payment
    • Upcoming vacation

I personally love the 50/30/20 budget as it allows you have some flexibility with your spending.

Many people fail at budgeting because it is so strict that it doesn’t allow people to spend any money. Humans are only so disciplined.

Eventually, after saving every penny to pay off debt or reach a financial goal, you might lose willpower.

It’s no different than someone who is losing weight and never gets a cheat meal.

Budgeting is all about finding the right balance and figuring out what works with your financial goals. 

How the 50/30/20 Rule Breaks Down

From the previous example, here is how a $60,000 per year with 5% 401k deduction would break down: 

$60,000 Gross Salary

  • $3,000 401K contribution
  • $57,000 take-home pay ($3,703 per month)
  • 50% = $1,851
    • Rent: $1,200
    • Utilities: $150
    • Car Payment: $174
    • Car Insurance/Gas: $140
    • Groceries: $185
  • 30% = $1,110
    • Online Shopping (books, movies, small furniture, personal care, clothes): $380
    • Target (house supplies, pet care, etc.): $200
    • Restaurants/Entertainment: $280
    • Gym membership: $65
    • Haircut: $50
    • Netflix: $12
    • Leftover: $123
  • 20% = $740
  • School loan payment: $300
  • Emergency fund contribution: $200
  • Roth IRA: $240

Use the 50/30/20 as a guideline for your own finances but don’t be afraid to edit for your personal situation.

Spending 30% on entertainment and optional wants might be high for you. If you want to spend less on the 30% for entertainment, contribute more for retirement or splurge for a bigger apartment.

Alternatively, you can also flip-flop the 30% and 20% categories to increase the amount going to your financial goals. If you’re still stretched for rent each month here are some easy ways to lower your rent payment. 

Alternatives to the 30 percent rule

There are some other ways to figure out how much you should spend on rent each month and still get the occasional iced mocha cappuccino.

A personal budget

Who looks at their gross dollar amount when thinking about how much to spend on rent or anything else? It’s your net — what’s written on your actual pay stub after your taxes, health insurance, retirement funds, flexible spending account, etc. — that you should consider. When developing your own budget…

  • Figure out how much you can afford in rent by thinking seriously about your must-haves, your lifestyle, your financial obligations
  • Take time to track your spending; three months’ worth is a good barometer
  • Remember to pay more than the monthly minimum on any credit card debt
  • Look for savings on things like car insurance, cable costs, groceries
  • Use one of the many free online budgeting tools. You can connect all of your financial accounts so you get the big picture.

The 50/20/30 rule

The 50/20/30 rule

Popularized by Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan,” the rule encourages you to divvy up your after-tax income this way:

  • 50 percent for living expenses and essentials rent, utilities, groceries, transportation
  • 20 percent for savings, investments, debt reduction (such as credit card payments)
  • 30 percent for things you want rather than need — travel, dining out, entertainment, hobbies

Monitor your spending for a few months to see what money you have to work with. This will work if you’re self-employed, but if your monthly income is erratic, it may take you longer to get all the information you need.

What’s good about 50/20/30 is its flexibility; you can play around with the numbers to individualize it and make it work for you.

The 80/20 rule

If you’re not into budgets, this is an easier way to go. It’s a simplified 50/20/30 rule that stipulates that you prioritize savings overspending. No categories required.

  • 20 percent of your income goes to savings
  • 80 percent of your income is for all the other stuff

What does savings mean? Money for retirement (long-term) as well as emergency funds (unexpected needs).

If you want to get fancy, you can divide the other 80 percent up by needs (food, clothing, shelter) and wants (toys, travel, entertainment, etc.).

The 80/20 method is simple and flexible. But if you need more structure, this method won’t work for you.

Envelope system

Some people are more tactile and visual than others. Cashing your paycheck and physically putting money into various envelopes labeled by expense can help you see exactly how much you need and have leftover each month.

Try a rent calculator

Once you’ve figured out a budget, use a rent calculator to help determine how much rent you can afford on your salary. The calculator will consider which city or town you want to live in, the type of space you want and your annual household income to come up with a decent ballpark figure.

Summary

Rent costs vary by city and your current income. Now you should have an idea of what percentage of your income should go toward rent.

It’s best to keep rent and living expenses below 50% of your take home pay to comfortably afford your other monthly goals.

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