We get questions all the time about how much rent should you pay based on your income.
For example, here is a recent comment from Alen:
“I have found a apartment for 800 a month with hot water and water included. I make 1139 net pay every two weeks . Do you think this is doable ? Thanks in advance.”
And another one from Jude:
“Hi, my bf and I are thinking about moving into our own place. We found a loft we really like to rent but we are trying to figure out if we are able to make that step. The monthly rent is $1700 w/out utilities . Combined we bring in $3800 before tax. Also we will be splitting rent and utilities. I’ve saved up about $2700 so far. My car is paid off and my parents pay my phone and car insurance. My bf makes his car payments so that will be an extra expense. Will a place like this be affordable to us? I appreciate if you can help us out.”
There are two simple ways to estimate how much rent you can comfortably afford on your income, depending on whether you have a fixed salary or are getting paid variable amounts, based on hours worked at different jobs, or tips earned.
Calculation 1 – Salaried Employee:
Take your annual salary – before taxes or any deductions – and divide that amount by 40. That is the standard measure many landlords use to decide whether they’ll rent to you. This number varies somewhat by market and by landlord. For example, in New York City some large rental companies divide by 45, requiring higher income for the same apartment, while some landlords in other markets may use 35, giving you the apartment with lower income.
In Jude’s example above, the couple makes $3,800*12= $45,600 a year. Divide that by 40 and their target monthly rent is $1,140.
This formula shows that they should not rent a $1,700/month apartment – it is more than $500 over their limit. With utilities, their monthly housing expense would be approaching $1,900, half of their pre-tax income. Even worse, their rent and utilities costs would take more than 60% of their after-tax paychecks.
In addition, Jude and bf should plan to save an amount equal to 3 times their expected monthly rent before the move. This will cover the first month’s rent, one month security deposit and other moving related expenses, and even leave a little money for some basic furniture.
For Jude, a target rent of $1,100- 1,200 would be more reasonable, particularly in light of the bf’s car payments.
Calculation 2 – Hourly Employee:
Take your average monthly take-home pay and multiply by 0.35. With this formula you’ll spend 35% of your cash income on rent. If your pay fluctuates widely, calculate an average monthly take-home over 2-3 months, or if you want to be really safe and conservative, use the lowest month.
In Alen’s example above, $1,139*2 monthly pay periods = $2,278* 0.35 = $797. So, the $800 a month apartment is affordable and leaves enough money to pay utilities, other living expenses and savings.
If you get paid every two weeks, like Alen does, using this formula you’ll be able to save the 2 extra paychecks you get each year. (Check the calendar and you’ll see that there are two months in every year with 3 pay periods.) You can use those extra paychecks to start saving for your own place. (If you get paid on the 15th and the last day of the month, there are no extra pay periods.)
Click here for a longer post on the costs of living on your own.