When I graduated college and started working full-time, I was living from paycheck to paycheck. My mom would get angry and say I wasn’t saving up in case of emergencies, but I figured it was just a millennials-vs-Baby Boomer sort of thing and she was comparing her savings as a fresh grad back when the economy allowed her and dad to buy their own house at a young age compared to my time and inflation.
But when I moved into my first apartment and began actively watching how much I spent just so I could pay for rent and utilities, I saw how much I spending on so many unnecessary items. After cutting back on Starbucks and takeout, I was suddenly saving much more and was beginning to mentally create a budget each time I got my salary.
After doing some research on budgeting, I saw how lucky I was to find a place like mine because it was the maximum rent limit for my salary. Apparently, just because you can pay for the rent – meaning your monthly salary is greater than the rent amount – doesn’t mean you can afford it when you budget your money properly. In fact, if you’re paying for rent in a budget that’s unfeasible with your salary and actual expenses, it could lead to poor money management. While that’s not to say some people really have low salaries and are working paycheck to paycheck, there are also those who only think they have low salaries but really just aren’t good at budgeting their money. And usually, it starts with how much they budget for housing.
Rule of Thumb: The 30 Percent Rule
You’ll find plenty of websites telling you that the rule of thumb is that you should be paying up to 30 percent of your monthly income. If your salary is at $4,000 a month, your rent should be no higher than $1,200. This is a good and generous measurement if you’re an average person, assuming you buy the average amount of food with a few luxuries now and then.
Financial experts recommend limiting your budget to 30 percent because it’s what the US government uses for people who need financial aid under their housing programs. People who spend 30-49 percent of their monthly income were more likely burdened by housing costs, while those who spent half or more of their income were classified under the severely cost-burdened category and the ones who needed the most financial aid for housing.
A 2015 study from the Harvard Joint Center for Housing Studies supported these findings. In 2014, over 21 million people – around half of the population who rented homes – were cost-burdened because they were spending too much on housing.
However, this is only the average and not applicable to everyone’s circumstances. For example, larger families may be less willing to spend a huge portion on housing because there are more mouths to feed and provide for. There’s also the issue of other people who have debts to pay.
The 43 Percent Rule
But if you have student loans or other high-cost payments that take away your income, a part of your budget will go to paying these, which means decreasing part of your housing budget to make ends meet. Instead, you’ll want to consider going for the 43 percent rule. Every month, your rent and debt payments should not exceed 43 percent of your income.
The other 57 percent will cover other expenses such as utilities, food, transportation, and savings, but the debt and rent shouldn’t exceed that 43 percent. This won’t leave much money left for a rent budget, but finding a place to fit in with that budget or using refinancing loans to extend your loans for lower monthly payments can help you budget your money.
The 50-30-20 Rule
A third budget model is the 50-30-20 rule, good for fresh graduates and people who admittedly spend on luxuries and non-essential items. 50 percent should go to all the essential costs you’d expect in a month: aside from housing, there’s utilities, transportation, food, and other necessities. 30 percent goes to non-essential items and entertainment. Finally, 20 percent goes to savings and loan payments.
This is not applicable if you have monthly loan payments that go over the 20 percent mark of your salary. Also, if you want to save up for something much bigger than the 30 percent on non-essential items, you might want to transfer some of that 30 percent into the 20 percent savings. This is especially important when you’re on your way to retirement and need to save up.
What if the area I want to live in can’t fit any budget?
Budgeting your money is easier said than done. In some crowded cities, it is difficult to find affordable rent even for a small apartment. Places like New York’s Upper Manhattan, for example, is a place only the truly wealthy can afford to get a penthouse, and even if you’re looking at a small studio apartment in the area, it could set you back thousands of dollars a month.
The only time I’d recommend you increase your budget limit is if the landlord has already included the cost of utilities on your rent. Consider your average utilities payments and add that to your monthly rent limit. If the cost inclusive of utilities fits in with the total, it can fit in your budget.
In case it won’t fit your budget, you might want to consider moving to the outskirts of the city (places farther from the city center cost less than those at the heart of the hustle and bustle) or a neighboring city where it’s much easier to commute to the area.
Otherwise, you’ll have to sacrifice a few luxuries such as cable TV, eating out, or saving for vacations. However, if the apartment is big enough, you could also opt to find a roommate to share the expenses. A two-bedroom apartment is much cheaper with a roommate than renting a one-bedroom apartment by yourself.
Not all these budgets can strictly fit in with your salary and expenses, but it helps to have a budget to help you spend. With the freedom of moving out of your parents’ home and moving into your own places comes with the responsibility of paying for rent and other necessities that will cost money. Having a budget keeps you on the right track and making sure you have money when you really need it, instead of spending thoughtlessly on things you won’t need.
