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How much should you spend on rent?

There are several factors that determine what percentage of income should go to rent, which we’ll cover in this article. The main factors to consider when calculating rent affordability are your monthly income and expenses/debt.
 
The best way to figure out how much you can spend on rent is to create a budget. By looking at the numbers you’ll be able to determine where you can cut expenses to increase monthly savings.
 
Renting a house or apartment starts with having enough money saved for the first month’s rent plus a security deposit.
 
At Credit Union of Southern California (CU SoCal), we make opening a savings account easy!
 
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgages, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.

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What percentage of my income should go to rent?

Here is an overview of financial guidelines for how much of your income should go to rent.
 
The 30% rule. This classic budgeting “rule” recommends that people not spend more than 30% of their gross income on rent or housing, and it asserts that spending more can put you at a financial disadvantage. However, new information recently published in Bloomberg states that this rule is too arbitrary and “nearly useless.”
 
The 50/30/20 rule. This rule dictates how your after-tax income should be distributed as a means of budgeting.
 
50%: To be spent on necessities.
30%: To be spent on wants.
20%: To be spent on savings and paying-down debt.

What is my rent-to-income ratio?

A rent-to-income ratio is a measurement of an individual’s monthly rent cost compared to their monthly income. To calculate your rent-to-income ratio, divide your monthly rent amount by your monthly income. Financial experts consider the rent affordability threshold to be below 30%.
 
Example:
Monthly rent ÷ monthly income = rent-to-income ratio
$1,500 ÷ $3,800 = 0.3947 (.39%)
 
In this case, the rent price may not be easily affordable and you should consider finding a lower cost option.

Determining how much you can spend

Whether you’re about to rent your first apartment or are currently a renter and want to update your budget, here are some tips you can use to calculate how much you can afford to spend on rent.

1. Track your expenses. Knowing how much you generally spend each month is the first step to knowing how much you can afford in rent. Most credit unions and banks provide online features that let you track your spending.
2. Eliminate unnecessary spending. The first step is to reduce your unnecessary expenditures across the board and to put that money into your savings account. This can include reducing your takeout orders and reducing your monthly recurring costs (cable, streaming services, gym membership).
3. Pay down debt. High-interest debt connected to student loans and credit cards should always be paid off or paid down prior to taking on the financial responsibility of renting an apartment. The lower your monthly expenses, the more you’ll have available to spend on rent.
4. Create a budget. Start by adding up your monthly income sources and your monthly expenses. After your expenses are paid, how much is left over for savings? After you’ve deducted money to put into savings, see what’s left to spend on monthly rent.
5. Create an emergency fund. Before spending a lot of money on rent it’s important to have enough money saved in case of an emergency. Financial experts recommend that individuals have enough money in their emergency fund to cover three to six months' worth of living expenses. If you do not have emergency funds saved, you may need to apply for an emergency loan, which will cost you to pay back the loan with interest.
6. Research different locations. If you have your debts paid, an emergency fund and healthy savings, and are ready to rent but find that the rents are too high for your budget, you may need to consider several locations where rents are lower.

Perhaps you’re undecided as to whether to rent or buy a home. Run the numbers. Use this Mortgage Qualifier calculator to get an estimate of your monthly mortgage payment. This will help you determine how much you can spend on a new home.
 
If those numbers don’t work with your budget, then renting is still an option which will give you more time to save up money until you can afford to buy a house.

Other costs to consider

Moving into a rental home or apartment is fairly easy, but there are usually additional costs to be aware of.
 
All fees should be clearly stated in your rental lease agreement and provided to you to review before you sign.

• Move-in / move-out fees. You may be charged fees to move in and out. This is to cover any damage done during the move, such as chipped paint.
• Security deposit. Most landlords will ask for one month of security, while others may want two or three months. The security amount is typically equal to one month’s rent. This means that renting a $2,000 a month apartment could require $6,000 be paid up-front, along with the first month’s rent.
• Utilities. Some landlords cover some utilities, such as basic cable and trash pickup. Be sure to ask what’s covered before you sign a rental lease agreement.
• Renter's insurance. You’ll want to protect your belongings in case of a fire, theft, or water damage from plumbing issues that may occur. Shop around for policy premiums to get the best coverage at a price you can afford
• Pet fees. Some landlords charge an extra monthly fee if pets will be living with you. This could be as much as an extra $100 a month.

Renting vs. buying: which is better?

Renting and buying each have advantages and disadvantages. The first consideration is how much you can afford to spend. If you know your income will rise steadily, consider starting to save for a down payment on a house. If your income is flat, then it’s probably a good idea to rent until you have more financial stability. If you need the flexibility of moving every few years, renting is a viable option that can save you money.

How much is too much rent?

Paying rent is a personal and financial decision that only you can make. Generally, the rent you pay should be affordable for you. Affordable means that you can:

1. Pay your monthly rent.
2. Buy groceries and other everyday essentials.
3. Pay your monthly loan installments and credit card debt on-time, all the time.
4. And, have money left over to put in a savings account.

If you are currently renting and find that you are not able to pay your bills, and debts are adding up, then you’ll need to find a lower rent apartment, get a higher paying job or second job, or share a living space with another person whit whom you can split the rent.
 
If you are considering renting, be sure you can afford it before you make the move.

Why savvy consumers choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
 
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

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