How Much of Your Income Should You Spend on Housing?

As you move out on your own and get a job that needs to cover all of your expenses, one of your biggest decisions is where to live. Your housing is typically your largest monthly expense, and you have a wide range of places to choose from. Before you go out looking at apartment rentals, determine how much of your income you can spend on housing each month so you can stick to this budget.

Rule of thumb: Spend a fixed percentage of your income on housing

The general recommendation is to spend no more than 30% of your gross monthly income (before taxes) on rent. Therefore, if you’ll be making $4,000 per month, then your rent should be $4,000 x 0.3, or about $1,200. Another way to calculate this number is to divide your annual income by 40.

However, if you’re a college senior with student loans, you will want to factor your student loan payments into your calculations. The 30% rule doesn’t really account for a high debt load. Instead, consider using the 43% rule, which is borrowed from the mortgage lending world. With this rule, your monthly housing cost plus all monthly debt payments should not exceed 43% of your monthly income. If your student loan payments are very high, this might not leave much money left for rent. One way to decrease your debt payments is to refinance student loans for a longer term or a lower interest rate.

Tips for making your housing budget work

If you are planning to live in a very expensive area, then 30% of your income (or 43% of your income minus student loan payments) might not be enough to rent even a small apartment. Some of the most expensive areas include much of California, New York City, Boston, and Washington, DC. If you are looking to live in these areas, you will be looking at paying $2,000 a month (or more!) for a 600-800 square foot apartment. If you’ll be living in a rural area or in the south, however, you might be able to get 1,000 square feet for under $1,000 a month.

What can you do if your housing costs are looking like they are likely to exceed your budgeted amount?

• Consider the cost of utilities, including gas, electricity, water, and cable. If utilities will be included in a particular rental you are looking at, then you can probably afford the slightly higher rent.
• Look for housing with good public transportation or within walking distance of your job so you can spend less on gas or even choose to not have a car at all.
• Plan to spend less in other areas of your life by not getting cable TV, eating at home instead of eating out, or not going on any vacations until you’re making more money.
• Get a roommate so you can split the cost of a 2-bedroom apartment in half, which is much less expensive than paying for a 1-bedroom apartment on your own.

Especially if your budget is tight, you might find that the landlord or apartment leasing office wants you to have a cosigner for your lease. Cosigners are people with strong credit histories and steady incomes who sign the lease with you and take legal responsibility alongside you for making payments on your apartment. Consider asking a parent, grandparent, aunt, uncle, or older sibling to be your cosigner if you need one.