Using annuities in trusts
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Learning how to live on your own can be an exciting time in your life, but it’s also a big and costly transition. One of the first and most important decisions you’ll need to make involves finding a place to live that fits your budget. Because this is typically your largest expense, it raises the question: How much should you spend on rent? The following factors can help you determine the appropriate amount and narrow down your rental search.
To determine what you can afford, start by compiling a list of all your current monthly expenses. This will include regular payments on your cell phone and vehicle, as well as memberships and subscriptions. But be sure not to overlook the less predictable expenses, such as transportation, groceries, dining and entertainment. Finally, don’t forget to factor in student loans or other debt you may be paying off. Once you have a thorough list of monthly expenses, add them all up and subtract that number from your monthly income to calculate how much you have left for rent and utilities.
You may have heard of the 30% rule, which is commonly accepted in financial circles and a guideline many landlords follow when determining if applicants can afford to pay their rent. The rule basically recommends that your monthly rent does not exceed 30% of your gross monthly income. Although this rule can provide some guidance on how much of your income should go to rent, it’s also important to note that it was established decades ago and doesn’t account for more recent developments such as inflation or student loan debt. It’s also not personalized to your earnings, financial goals, or the rental prices in your particular housing market.
What does that mean for you? Whether you are a recent graduate paying off large debt or a high-income earner who wants to focus on saving, you may want to aim for less than 30%. On the flip side, if you landed your dream job in an area where rent prices are skyrocketing, it may be necessary to spend more than 30% and look for other ways to preserve more of your monthly income.
Another popular financial guideline is the 50/30/20 budget rule, which provides a spending template that directs 50% of your after-tax income on needs, 30% on wants and 20% towards savings. Needs refer to the essential expenses that you absolutely must pay, such as rent, renters insurance, groceries, utilities, transportation, healthcare, and minimum debt payments. Wants include your optional expenses like streaming services, eating out, vacations and entertainment.
And finally, there’s the often neglected but very important savings category. This income allotment should go towards building up an emergency fund, your retirement, and other investments to meet your future financial goals. So, if you are bringing home $4,000 a month after taxes, you would follow the 50/30/20 rule by allocating $2,000 to your needs, $1,200 to wants and $800 to savings.
If you currently live with your parents or roommates, you might be missing some basic home essentials that you’ll need once you move out on your own. To determine an appropriate budget for these items, concentrate on the bigger purchases such as furniture and appliances. Then consider other home goods you use on a regular basis, from kitchenware to a vacuum. Once you’ve compiled a list, make sure you set enough money aside to cover these expenses. You could also save money by looking for secondhand and reconditioned items before buying anything brand new.
Often there is so much focus on monthly rent when looking for a place to live that move-in fees and other moving expenses are overlooked. But you’ll want to be prepared for these various deposits and fees because you’ll be responsible for them before your first rent check is due. Expect possible fees for the application, a background check, parking and pets.
Move-in fees are relatively new and should also be on your radar. They cover the costs associated with turning a property over from the previous tenant to you, such as changing the locks and updating the building directory. Your landlord may require you to pay a security deposit to cover potential damage to the property and a deposit equal to two months’ worth of rent in case you move out before your lease is up. Unlike fees, deposits should be returned to you unless you violate the terms of your lease.
As noted earlier, utilities are an expense you must pay, so you’ll need to prioritize these bills in your budget. They can include gas, electricity, water, sewer, trash, internet, pest control, and other services. The costs can vary greatly by location, so conduct some research before you make any decisions. Also, you should expect and plan for some utility bills to fluctuate throughout the year, such as electricity bills increasing during the summer months when air conditioning is needed to cool your home.
Now that you have a better understanding of what you can afford by applying the 30% and 50/30/20 rules, you can calculate an appropriate budget for move-in fees, rent and utilities. Remember that your particular situation may require straying from these rules to some degree, but keeping the general intent of the rules in mind will help you avoid getting in over your head financially during your rental search. Setting a budget, understanding your lease and following other guidance for first-time renters will provide you with peace of mind to comfortably enjoy your new home!
If you find yourself in a hot housing market or expensive metro area, your rent-to-income ratio might be higher than you’d like. This isn’t uncommon, but fortunately there are plenty of ways to cut other expenses. Smart planning and discipline can go a long way – whether you’re using conservation to save on utilities, coupons to save on groceries or public transportation to cut back on gas. You can also spend less on non-essentials by cooking at home and packing lunches instead of eating out, cutting unnecessary subscriptions, or shopping for clothes secondhand instead of new. If you’re still struggling, you may need to consider temporarily sharing the cost of rent and utilities with roommates. In addition, you can try negotiating your rent with the landlord.
Wherever you end up renting, you need to protect yourself, your space and your belongings. Find the right renters insurance to suit your lifestyle and budget so you can enjoy your new home worry-free.
“What Percentage of Your Income Should Go to Rent?” (April 8, 2020)
“What Is the 50/20/30 Budget Rule?” (Oct. 29, 2020).
“What You Can Expect to Pay in Additional Fees When Renting an Apartment,” (Feb. 14, 2019).