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The answer to the question, “How much should I spend on rent?” is a highly variable one, but, as a guideline, the number is typically 30% of your income.

Figuring out your “magic number” will require a little thought…and math. Individual situations certainly differ. Maybe you have a heavy monthly student-loan payment while your best friend has none. In other words, they have more disposable income than you and could likely pay a higher rent. Or perhaps you have a trust fund which gives you a degree of financial security but your best friend doesn’t: In this case, you might be comfortable putting more towards rent than your pal.

While 30% is a guideline, most Americans are paying more than that right now. The latest figures say that the typical citizen is paying closer to 32% of their income, or about $1,792 per month. Rents have been climbing, increasing by double digits year over year, so it’s not always possible to stick below that 30% guideline.

Here, we’ll take a look at how to budget for your rent, what a reasonable rent is for your income, and how to figure out different angles on what you can afford to pay for rent.

Budgeting: What Should You Spend on Rent?

Whether you rent or own, housing is typically the largest expense the average U.S. consumer must pay for every month.

Determining how much you pay is really a matter of better monthly budgeting. The question isn’t “How much can I spend on rent?” it’s “How much should I spend on rent?” It’s best not to max out your take-home money on rent and leave some wiggle room in your budget. You can take a look at your income after taxes and other deductions are taken out. Then you might look at what you’re spending now on rent, food, entertainment, transportation, clothes, and other costs. What can you afford to pay in rent that will allow you to live comfortably, do what you like (whether that means eating out often or affording vacations), pay your bills, get rid of any debt, and save some money, too?

No matter which rent formula you choose, it all comes back to your budget.

It’s a lot to figure out (and then to stay on top of) once you set your budget and determine how much to spend on rent.

And if you can reduce your rent payment, you’ll likely have a bit more flexibility in choosing where to allocate your money — whether that’s spending it, paying down debt, or saving for a future goal. Along with reducing small indulgences, sticking to a reasonable rent can be an effective way to free up more cash in your budget.

That’s a tall order in today’s hot housing market, for sure. But it can make a huge difference in terms of your overall financial health and your stress level. Wondering how to make rent every month can be a real source of anxiety. It may be better to, say, ward off “lifestyle creep” and rent a home with one or two fewer perks or amenities to keep the price down.

Recommended: Smart Debt Payoff Strategies

Strategies for Figuring Out How Much to Spend

Next, let’s dig into how to figure out the amount you can spend on rent every month. We mentioned a ballpark figure, but remember: There’s no single magic formula, and everyone’s situation is different.

That said, there are several formulas out there that you can use as a guide. Here are three:

The 30% Rule

We’ve already mentioned this rule of thumb — one that’s been around for decades — which puts the ideal housing costs at 30% of your after-tax income, no matter how much you earn.

That rather broad guideline dates back to the Brooke Amendment, which capped public housing rents at 25% of an individual’s income in 1969. Congress raised the cap to 30% in 1981, and eventually it became the go-to guide for determining “cost burden” — the amount of income a family could spend and still have enough left for other expenses — even those who aren’t in low-income households.

Critics of this model advise using it as a starting point rather than a rule when determining a spending limit. Depending on how much you earn, 30% of your income could be more — or less — than you actually can afford to pay in rent.

Your location could also influence whether or not the 30% rule is realistic for you, since depending on where you live, accessibility may be a factor. Can a person who makes $40,000 even find a rental for $1,000 a month in most cities? It would likely be a challenge.

And, again, when you’re looking at renting a home, you’ll likely want to weigh what you’ll get vs. what you’ll give up. This isn’t just in money, but in time, safety, and happiness. Is the cool place downtown worth it if you can’t afford to go out and enjoy the nightlife? Is a longer commute or a roommate out of the question, or could those options open doors to your dream home?

Recommended: Price to Rent Ratio in the Top 50 Cities

The 50/30/20 Approach

If you’re a disciplined budgeter, you may already be familiar with this model, which was made popular by Sen. Elizabeth Warren’s book All Your Worth: The Ultimate Lifetime Money Plan.

The 50/30/20 budgeting method suggests dividing your after-tax income into three main categories, putting 50% toward needs (essential costs like housing, transportation, groceries, utilities, etc.), 30% toward wants, and 20% toward savings.

Following those guidelines, your rent would qualify as a need. But it remains up to you to decide how much of that 50% you want to — or feel you have to — spend on housing.

If your home is your castle, and your castle is in a major city or tech hub, it could be a lot. Which means you may have to make adjustments to other “essentials” in your budget or perhaps borrow from other categories (so …maybe fewer massages and dinners out).

The Budget Backwards Formula

Another way to budget is to look at your take-home pay and work backwards, deducting your expenses to see how much of a range you have for rent. Maybe you take home $4,000 a month. From that figure, deduct things like student loans and credit card debt you are paying down. Do you have a high-yield savings account where you are stashing some cash — say, are you putting money towards a vacation or new car fund? Subtract those too.

Then look at your typical monthlies in terms of food, utilities, transportation, gym memberships and subscription services, and the like. Take those off the remaining monthly amount and take a look at what is left. Of that sum, how much can you put towards rent, keeping aside some cash for discretionary spending? Once you know what number suits your finances, you can go hunting for a rental.

The Takeaway

Figuring out how much you can spend on rent involves some basic math. For instance, one common guideline says that 30% of your income (before taxes) can be allotted to rent. But everyone’s financial profile is different. Some people live in cities that are pricey; other people have student and car loans taking a big bite out of their money. Use the guidelines here to figure out the right number for you, and recognize where you may need to compromise. For instance, if you are paying off debts for the next couple of years, maybe it’s a good moment to consider having a roommate. There’s no one-size-fits-all answer.

Flexibility also matters when it comes to your personal banking, and SoFi understands that its clients have different needs. If you’re planning on opening a bank account online, consider our Checking and Savings. You can spend, save, and earn all in one place — complete with mobile transfers, photo check deposit, and customer service. Plus, when you sign up with direct deposit, you will earn a terrific APY and pay zero account fees.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

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SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

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When a company reduces its greenhouse gas emissions, it can earn carbon credits which may then be traded to other companies which need to offset their own emissions. Individuals can invest in the carbon credit market in a few different ways, including direct investment in low-carbon companies, or via exchange-traded funds (ETFs).

The global carbon market is expanding quickly. The carbon commodities market increased from $270 billion to $851 billion between 2020 and 2021. The market is projected to reach $22 trillion by 2050.

Learn more about how to invest in carbon credits, and the pros and cons of this asset class, including portfolio diversification.

What Are Carbon Credits?

Carbon credits are a way of valuing or pricing how much a company is reducing its greenhouse gas emissions. Companies that directly reduce their own greenhouse gas emissions, including carbon (CO2) can earn credits for doing so.

These carbon credits can be valuable to other companies that aren’t able to meet greenhouse gas reduction targets. So they buy carbon credits from the companies that have them. Typically, companies that are in a position to sell carbon credits can make a profit. Each carbon credit represents one metric ton of carbon dioxide emissions. They are traded as transferable certificates or permits until they are actually used by a company and effectively retired.

For investors who are interested in ESG-centered strategies (i.e. companies that follow proactive environmental, social, governance policies) learning how to invest in carbon credits may be compelling.

What Is Cap and Trade?

An important dynamic to understand when deciding how to invest in carbon credits is the worldwide cap-and-trade market. Certain governments have put programs in place that place a limit or cap on the amount of greenhouse gases that companies can emit each year. Caps vary according to industry and company size.

Over time the cap can be reduced to force companies to invest in green technologies and reduce their emissions. Any emissions above the cap must be covered with the purchase of carbon credits (hence the term “cap and trade”), otherwise the company must pay a fine.

If a company is able to reduce their emissions, they can then sell those carbon credits to other companies, and make a profit on them. If they need to emit more than the cap, they buy additional carbon credits. As governments lower emissions caps, demand increases for carbon credits, and their price goes up.

Not every country has a cap-and-trade policy, but they have gained traction in the European Union, certain states in the U.S., the U.K., China, and New Zealand.

How Have Carbon Credits Become a Big Market?

For those interested in investing in carbon credits, consider this: Over one-fifth of global greenhouse gas emissions are now covered by carbon pricing initiatives, and even more are covered by voluntary carbon market purchases. This article focuses on the compliance carbon credit market created by governments, but it’s important to know the distinction between that and the voluntary carbon market.

In the voluntary market, companies choose to purchase carbon offsets as a way to cancel out their emissions. Carbon offset projects include emissions-reduction and removal initiatives such as tree planting and producing renewable energy.

In theory, this system allows certain companies to participate in the global system of reducing harmful emissions like carbon, even if those companies are still striving to attain low-emission goals in their own production or distribution systems. For example, some industries, such as cement and steel manufacturing, are unable to reach net zero emissions, so they can purchase carbon credits to help offset the emissions from their manufacturers.

3 Ways to Start Investing in Carbon Credits

Carbon markets are not as robust in the U.S. as they are in other countries, but this will likely change in the future. For now, there are a few ways investors can get started investing in carbon credits. This could be considered a form of impact investing.

1. Carbon Credit ETFs

An exchange-traded fund (ETF) is a pooled investment fund that tracks the performance of a certain group of underlying assets. There are carbon credit ETFs that track the performance of carbon markets. Some ETFs track a certain group of companies, while others track indices, futures contracts, or other asset groups.

2. Carbon Credit Futures

Another way to consider investing in carbon credits is through carbon credit futures contracts. Futures contracts are derivatives linked to underlying assets. A buyer and seller enter into an agreement to trade a particular asset for a certain price on a certain future date. With carbon credit futures, the underlying asset is the carbon credit certificate.

Carbon credits such as the European Union Allowances and the California Carbon Allowances have futures available on exchanges. However, carbon credit futures are complicated investments so they are only recommended for more experienced investors.

3. Individual Companies

A third way that investors can get involved in carbon markets is by investing in stocks of individual companies that generate or actively trade carbon credits. By investing in those companies investors can indirectly invest in carbon credits.

Other companies are investing significantly in decarbonization and decreasing their own carbon footprint. These are sometimes referred to as green stocks.

Also some companies have a business model focused on investing in carbon projects, so investing in those provides a targeted exposure to carbon credits.

Other Ways to Invest in Carbon Credits

There are also some newer private companies in the carbon credit space to keep an eye on. Although there isn’t a way for a retail investor to invest in private companies, it might be worth tracking these companies as they may go public in the future.

Additionally, new exchanges such as the trading platform LIBER have started offering retail investors exposure to portfolios of curated carbon credits. These credits may be grouped by region or by type, such as forestry or renewable energy projects.

💡 Recommended: 27 Ways to Invest in a Carbon-Free Future

Pros and Cons of Investing in Carbon Credits

While there are several benefits to investing in carbon credits, there are some risks and downsides as well.

Pros

•   Profitability: Investing in carbon credits can be very profitable, and the market is predicted to continue growing in the coming years.

•   Environmental and social benefits: Carbon pricing incentivizes companies to reduce their emissions, and as emissions caps tighten, and the price of carbon credits goes up, it gets more expensive for companies to pollute. By investing in carbon credits, investors can contribute to an emissions-reduction strategy that benefits both people and the environment.

•   Easy to invest: Investing in a carbon credit ETF is just as simple as investing in any other ETF. Investors can gain exposure to carbon markets without directly trading futures or researching individual companies.

•   Low supply and increasing demand: Currently there is a limited supply of carbon credits, and corporate demand for them is increasing. Companies are pre-purchasing them to cover emissions many years out, so their value is increasing.

•   Weak correlation to equity markets: Carbon credits can be a good way to diversify one’s portfolio because they don’t have a strong correlation with the rest of the stock market.

•   Price floor: Certain regions, such as Germany, are considering putting a lower limit on the price of carbon credits. This means their value could only go up from that price floor. California has a minimum carbon price that increases 5% plus inflation every year.

Cons

•   Potential risks: Certain carbon credit ETFs track carbon credit futures, which can be volatile and risky assets. Also, the carbon credit market is relatively new, so there is a limited amount of past performance data to refer to.

•   Narrow exposure: Carbon markets are limited to certain regions and are still a relatively small market, so investing in them doesn’t provide a lot of portfolio diversification.

•   Limited environmental impact: Cap-and-trade policies are designed to limit corporate emissions and reduce them over time, but they are also essentially permits to pollute. Rather than reducing emissions, companies can simply purchase more carbon credits. Therefore, the actual environmental benefit of investing in carbon credits is limited.

•   Not all carbon credits are the same: Some carbon credits are higher quality than others, and various factors go into determining their true value. It’s important to purchase through reputable ETFs or brokers to ensure the credits are legitimate and have value.

Risks and What to Watch For When Trading Carbon Credits

Investing in carbon credits may be profitable, but all commodities markets, including carbon markets, come with some risks investors should be aware of.

Carbon credit futures are speculative and can be very volatile, so ETFs that track them come with associated risks. Additionally, carbon credit ETFs only provide exposure to markets that have cap-and-trade programs, such as Europe and California. Therefore, they don’t provide investors with a broad exposure to carbon markets.

Also, carbon credit schemes are created by governments, and there is a risk at any time that a government could intervene and change the program or reduce the price by increasing the cap.

For this reason, carbon credit ETFs can be a good way to diversify one’s portfolio, but aren’t necessarily a place where investors should allocate a large portion of their money.

Steps to Start Investing in Carbon Credits

As an individual investor the way to invest in carbon credits is through ETFs and other pools. There are a few simple steps to start investing in carbon credits.

Step 1: Open a Trading Account

The first step is to open a brokerage account that offers ETFs. There are easy to use online trading platforms, such as SoFi Invest, where investors can buy ETFs, stocks, and other assets.

Step 2: Research and Decide on a Carbon Credit ETF

There are several different carbon credit ETFs to choose from. The next step is to research and choose one or more ETFs to invest in.

Step 3: Invest

The final step is to invest in the chosen carbon credit ETF using the trading account. Once the purchase has been made, the investor can track the ETF in the same way they would track any other stock or asset in their portfolio. Historically, carbon markets have shown volatility in the short term but have increased over the long term, so investors should keep that in mind when deciding how long to hold onto their investment.

Is Carbon Credit Investing Right for You?

Investing in carbon credits can be a profitable way to get involved in a growing market and support the transition to a low-carbon global economy. Since their launch, carbon credit ETFs have increased in value. However, they do come with risks, and past performance is not a predictor of future performance.

If an investor is looking to diversify their portfolio, allocating a small amount to carbon credit ETFs may be one good option.

The Takeaway

Carbon markets are growing quickly and predicted to be a huge industry in the coming years. There are several ways for retail investors to get involved by investing in carbon credits. Carbon credits are generated by companies that are able to reduce their own greenhouse gas emissions over and above what the company itself may need. This puts the carbon-credit-generating company in a position to sell their carbon credits for a profit, to the companies that need to offset their own emissions.

This system has some pros and cons from an environmental perspective, as well as from an investing perspective. Does trading carbon credits truly reduce global environmental pollution? While that remains open for debate, what does seem clear is that the demand for carbon credits is only growing, which is likewise spurring the growth of some investments, like carbon credit ETFs.

If you’re looking to start building an investment portfolio, one great way is using SoFi Invest®. The online trading platform lets you research, track, buy and sell ETFs, stocks, and other assets right from your phone. You can get started investing with just a few dollars.

Start investing today.

FAQ

How do you make money with carbon credits?

Carbon credits increase in value when demand for them increases and supply decreases. As regulated emissions caps decrease, demand increases, as does price. Investors can make money with carbon credits by purchasing carbon credits and selling them when their market value increases.

How much does it cost to buy a carbon credit?

By investing in carbon credit ETFs, investors can gain exposure to carbon markets with a small amount of capital. The value of an individual credit fluctuates based on various market factors.

How much is an acre of carbon credits worth?

The market price for carbon credits ranges from under $1 to over $150. The per-acre rate that suppliers make depends on the type of land and project as well as the current carbon credit market rate.

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