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.
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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.
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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?
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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.
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.
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