Rule of Thumb for How Much to Spend on Rent

Simple budgeting tips can help assure you can afford that new place.

Housing is the largest monthly expenditure for most people. Budgeting is one of the key aspects of personal finance, and if you are trying to save money or pay off debts, it's the place to start. By planning ahead, you can be sure you aren't getting in over your head.

General Budgeting

Making a complete budget, including all your income and expenses, is the first step to be certain you can afford the house or apartment of your dreams. Take some to time to go through previous months' spending habits and be honest about how you spend your money. Consider only after-tax pay, since that's what you'll have to pay your rent and other bills with.

The three largest categories for spending are housing, transportation and food. Little expenditures add up, so that's why you want to look at previous spending habits. Don't forget that transportation includes your car payment, car insurance, gasoline, parking or tolls you pay monthly.

Consider how much you need to save each month as well, so you have a cushion for those months with unexpected expenditures or to plan for a vacation.

Some of your expenses may change if you move, so do a current budget and a future budget based on the actual costs you'll have in the new location.

Housing Expenses

Rent is not the only housing expense to consider.

A general rule of thumb is that housing expenses should be more than one third, or 33 percent of your take-home pay. But rent may not be the only expense related to housing. Remember to keep track of renter's insurance and utility bills, including water, gas, and trash pickup. If you find your other housing expenses are low, you may be able to comfortably spend more than one-third of your take-home pay.

If you want to spend more than one-third, make sure your other monthly expenses leave you enough left over to cover the difference. If your income is $2,000 a month and housing costs are $1,000, transportation is $500, and food and entertainment come to another $500, you won't make it unless you figure out ways to cut spending.

Exceptions to the Rules

The other two big expenditure categories are transportation and food. If you find your spending there is fairly low, you may be able to cover a higher housing expense. If the house or apartment you have set your sights on plus other housing costs is more than about 35 percent of your take-home pay, it's time to examine the rest of your spending to see where you can cut enough to leave a comfortable margin each month.

If your new apartment is in a complex with a pool, fitness room or other amenities, you may be able to cut out some of the spending you do now for those activities. In this case, a higher rent will be offset by lower entertainment expenses. If it's closer to work and you save money on gas, that's another plus to making the move. Adjust your budget for the costs you'll have once you move and then re-evaluate to see if these savings make the higher rent affordable.

Where to Cut

Wait for a DVD instead of seeing a new release in the theater.

If your analysis shows the rent and other housing costs are going to be significantly more than one-third of your income, it's time to take a close look at where you can feasibly reduce spending to give yourself a little breathing room after you pay all the bills.

Entertainment and dining out are two of the easiest areas where you will be able to trim spending. If you buy a coffee every morning, try cutting back to three days a week, or wait until you get to the office and drink the coffee for free. It may not taste as good, but when you're enjoying the new apartment, it will probably seem a small sacrifice.

References

• CNN Money: Basic Budgeting
• CBS Money Watch: How Much Should You Spend on Rent?
• Move.com: How Much Rent is Too Much?