Over 100 million people live in rental properties in the United States. This includes properties like homes, condominiums, and apartments. Therefore, chances are high that you pay monthly rent rather than a mortgage. Rent rates vary from city to city, and even different areas within a single city can feature staggering differences. Certain areas in the country even feature rental rates that match mortgage rates.
It’s a simple fact that millions of people struggle to pay their rent each month. Plenty of people pay late on a regular basis. Otherwise, a late payment or two per year is quite common. An increase in rent or an unexpected expense can make paying the rent a challenging task. You’ve undoubtedly experienced such situations from time to time. We can’t control everything in our lives related to money after all.
Here’s a simple question: can you afford your rent? Nothing is worse than a monthly rent that eats up most of your income. American consumers deal with that exact situation on a regular basis, though. Without a doubt, you should take stock of your current financial situation and figure out how much you rent impacts your financial livelihood. The results could prove shocking to say the least.
To figure out the answer to this question, let’s start crunching the numbers!
Step 1: Create A Basic Budget
First, you should figure out how much you spend on housing, fuel, and groceries. Most households spend 60% of their income on these three expenses. Overreaching beyond this threshold can wreak havoc on your finances. Your budget should include how much money you earn from all income sources in a typical year. To paint an accurate picture, you should include things like employment income, investment income, and bonuses.
Annual income helps you determine how much you can spend on expenses like rent.
You should consider creating a more detailed budget now, or sometime in the near future. When you map out all of your expenses, then you acquire a better picture of your financial situation. With that information, you can make a lot of positive changes to increase your savings and decrease your expenditures. Only a basic budget is necessary to figure out your ability to pay the rent each month.
Step 2: Run Your Income and Rent Against Common Guidelines or Formulas
30% Income Rule
Most people know about the 30% Income Rule in which rent shouldn’t comprise more than 30% of your annual pay. In reality, a large number of people spend way more than 30% of their income on monthly rent. This guideline is still solid advice because it helps you reign in your expenses. The less money you spend on rent, the more you can put into savings or other expenses. You can still live comfortably passed this threshold.
In the United States, it’s not uncommon to see people paying 70-80% of their income in monthly rent. That’s not a desirable position to exist in, but some individuals and families can make it work. The takeaway here is that rent should take up the lowest amount of your annual income possible. By keeping rent low percentage-wise, you’re more likely to live a comfortable life with some financial stability.
40X Rent: Can You Manage It?
Many property management companies use a formula to determine if you can afford rent. Typically, landlords use a “40 Times The Rent” methodology to make this determination. Your annual income divided by 40 dictates what you can easily afford per month in rent. Annual earnings of $40,000 results in yourself being approved for $1,000 per month in rent. Such formulas help landlords approve financially stable tenants.
If you meet these requirements, then you can indeed afford your rent as far as many landlords are concerned. Other landlords use a variety of separate formulas to make that determination, though. Many property owners want you to earn 2.5 times more than the rent on a monthly basis. Sometimes, the entire decision is based upon your creditworthiness more so than anything else. Every landlord is slightly different.
You might consider using the 50/30/20 rule instead. This means that you should dedicate 50% of your income to fixed expenses. From there, 30% of your income goes into day-to-day expenses, and 20% falls into the financial goals category. A 50/30/20 spending formula ensures that you’re taking care of necessary expenses with some wiggle room for unexpected events. It even ensures that you take care of savings, too.
For obvious reasons, the 50/30/20 rule is more of a guideline because you can make modifications. Perhaps you want to spend 40% on fixed expenses, 20% on day-to-day expenses, and then put the remaining 40% into savings. Most people can’t manage that particular proportion. Still, all that matters is that your expenses are covered and that you’re putting money away for financial emergencies and future expenses.
Another Factor To Consider
In the end, you need to take a step back and consider your situation. Do you feel comfortable paying your current rent rate? Are you happy with the money you’re able to put into savings? There are countless ways to determine if you can pay your rent. Most people are satisfied with paying the rent and getting on with their lives. For that reason, how you feel about the situation does make a difference in many ways.
Using tangible formulas and calculations to answer that question comes with certain benefits, though. You can crunch the numbers and easily determine whether you can pay the rent or not, especially in the eyes of your landlord. With these numbers, you have real evidence that your money is going where it should based on your income. Such numbers allow you to see if adjustments are possible to lower expenses.
Either way, you can probably pay your rent in full on most months. Everyone experiences financial uncertainty throughout their lives. A late payment or two won’t become the end of the world. To avoid such situations, you should check out your financial and rent situation. Determine if adjustments can result in lowered rent or higher savings each month. A few changes could help you live more comfortably.
Rent shouldn’t be 70% or more of your income. Sadly, thousands upon thousands of people experience high expenses like that. A simple budget and assessment of your finances can make an incredible difference. Many people look at that picture and realize that they can improve their financial situation. Getting that rent rate closer to 30% isn’t necessary, but it can’t do any harm either.
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