Every month, people give a portion of their income for their rent. Before you start looking for an apartment, it is important that you determine how much you can spend on a monthly basis. The common and basic computation in determining your maximum rent budget is 30% of your annual income. However, there is more than that single number to determine how your maximum rent. You have to be willing to do the math if you want to avoid overpaying for your place. Here is a basic guide to help you find that number.
1. Check your cashflow
It is easy to calculate 30% of your income but are you sure you can really afford 30% going into your rent? First, you must determine how much money you are actually getting every month. Subtract taxes and loan payments from your take-home pay before making a list of your monthly expenses. For a fresh grad, there are student loans to be paid. For a young professional, you have your transportation and insurance. Calculating the 30% should not be based on your salary but rather on your take-home pay after all the deductions are done. Take into consideration your quarterly and annual expenses that can take a toll on your rent budget.
2. Determine your needs
Each person has a different need and want when looking for a place. Make a list of the things you need to have in your place and the things that are nice to have but are not required. This can help you narrow down your search and determine your budget. Call apartment buildings and houses to ask their rate based on your preferred number of bedrooms or floor size. Consider comparing other aspects of the apartments or homes including gym membership, free parking or other perks. If you get more perks for the same rent of another place, you might save more and avoid paying too much in rent because of extras. Remember that you should not pay for a certain amount just because you have the money. Determine how much you spend on other lifestyle expenses including entertainment, travel and restaurant. Plot the location you will choose as this can affect your transportation or gas expenses. Living in a cheaper place farther from your work may cost just as much as living in a relatively more expensive place but closer to your office.
3. Estimate utilities and extra expenses
Speaking about perks and extra expenses, your rent is not just the amount you pay your landlord every single month. Check if you or your landlord pays the utilities and what other necessary bills will be part of your rent. Some include the cost for water but excludes the electric bill. Others have a fix rate for cable or internet. There are additional expenses that will go into housing that must be part of your calculation. If you are sharing a place with roommates, discuss your living and payment arrangements. You can also check if the place includes furniture. The safer recommended percentage to compute would be less than 25% to make room for costs like insurance and utilities.
4. Finalize the numbers
Once you have your numbers laid out, you can start computing for your realistic rent budget. Note that your budget can be different from your neighbors or friends as they have different factors to consider. But when you get that magical number, you are still on track with your financial goals. If you do not factor your costs and needs, you might end up like 30% of Americans who are living with a high rent and survival daily budget. Building your emergency fund or retirement plan is more important than getting that posh apartment that eats your annual income.