Looking for a new place to rent is an exciting time. Whether you are moving into your first place or looking for something different, you need to know how much rent you can afford. There are a few ways you can work this out. While there is no one-size-fits-all answer to how much you should pay for rent, the 30% rule and the 50/30/20 rule are two methods you can use to determine how much you can afford to spend on rent.
What Is the 30% Rule?
The 30% rule ensures you have enough money to cover expenses such as debt repayments, savings, food, utilities, and entertainment. However, there are two weak points to the 30% rule.
First, it doesn't account for inflation, income stagnation, or rising rent prices. For example, the average rent in the City of Philadelphia was 19% higher in March 2022 than in January 2018. The average hourly wage rate increase at that time was only 2.5%, leaving a gap between renters' wages and rental costs.
Secondly, the 30% rule doesn't consider your situation. Your financial goals, debt repayments, and the average rental prices in the area all impact how much you can spend on rent.
What Is the 50/30/20 Rule?
If you have to spend more than 30% of your income on rent, you might try the 50/30/20 rule instead. This method splits your income into three parts:
- 50% on necessities or essential monthly bills such as groceries and rent
- 30% on non-essential expenses such as going out or other wants
- 20% on savings or debt repayments
The 50/30/20 rule has many benefits. It is simple, doesn't restrict your spending, and can help you reduce fixed costs by showing you exactly where your money is going. There are a few drawbacks to it, though. Like the 30% rule, it doesn't consider your unique circumstances. You might have higher fixed costs because of student debt. Maybe you want to save more money and find 20% isn't enough for your financial goals. Spending 30% of your salary on wants can be a lot. If you make $1,000, you can spend $300 on wants. Keep in mind all of this when creating a monthly budget.
Other Factors to Consider When Renting
You'll want to consider a few additional factors when renting. Every rental community has different requirements. There could be application fees, deposits and other costs to consider. Here are some of the most common expenses to bear in mind:
- Transport costs: If possible, try to find a place as close to your work and other amenities as possible. How long will it take you to get to work or shops? How much will it cost?
- Utilities: Does your rent cover utilities, or are they an extra cost? Keep an eye out for listings that mention if utilities are included. Some rentals might only include certain utilities such as water but not electricity or gas.
- Amenities: These are extras that come along with the rental and can include things like laundry rooms, air conditioning, fitness areas, security, parking, and storage. Some complexes provide these as part of the rent, but it is best to find out if there is an additional cost.
- Deposit and application fees: This can either be one month's rent or the first and last month's rent. If the place is pet friendly, find out if a pet deposit is required. Application fees might also apply.
- Renters insurance: A great option to make sure you cover your property and belongings in the event of theft or a disaster. In some cases, landlords may require you to have renters insurance before you move in, but not all do.
- Signing incentives: Landlords or rental agents often offer discounts or free months to renters to finalize a rental agreement.
Considering all these extras and possible discounts, how do you know how much you are spending on rent each month? The effective rent formula can help. Start with the lease length minus any free months. Multiply that number by the gross rent you pay, including amenities and other fees. Divide this by the full lease length to determine how much you pay each month. Always check with your landlord or rental agent about additional costs and discounts. They may not collect rent for one month instead of working out the effective rent amount and spreading it over your full lease.
Find the Right Rental for You with Property Management, Inc.
Moving into a new home is exciting, and you must consider many factors. There is a lot to plan for, from where you want to live to what you might need for your first apartment kitchen. Creating a budget and knowing how much rent you can afford is the first step in helping you find the right home for you. At Property Management, Inc., we are here to help you every step of the way. Our dedicated team can guide you through working out your rental costs on any of our exceptional properties. Take a look at our rental properties online or consult with our agents by calling 717-730-4141 today!