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How Much of My Gross Pay Should Go to Rent?

The financial industry provides estimates on how much people should spend on housing. However,no clear-cut answer exists for how much you should pay in rent because the cost of living in your area dictates rental rates. People who live in large cities may have to pay more than twice as much as others do for a small apartment. Therefore, a bigger percentage of their gross, or pre-tax, income goes toward paying rent.

Recommended Payments

    Financial advisers generally recommend that renters spend no more than 25 to 30 percent of their gross monthly income on rent. Therefore, someone who earns $40,000 per year could spend between $833 and $1,000 on rent each month. Calculate what you can afford based on those recommended percentages by dividing your annual salary by 12 and multiplying that number by either 0.25 or 0.30. However, your debt-to-income ratio provides a more realistic picture of your financial situation and how much rent you can afford to pay.

Debt-to-Income Ratio

    Calculate your debt-to-income ratio by adding up all of your required monthly payments for credit cards, car loans, student loans and other debts. Include your monthly payment for an apartment you currently rent or are considering renting. Divide the total for your monthly debts by your gross monthly income and multiply the answer by 100. Someone who has $1,200 in monthly debts and earns $3,333 in gross income each month has a debt-to-income ratio of 36 percent. The financial industry usually recommends debt-to-income ratios of 36 percent or less. A higher ratio may be a sign that you're taking on too much debt and should reduce your expenses.

Cost of Living

    It's important for renters to make adjustments in their rental budgets based on where they live, regardless of recommendations on rental expenditures from the financial industry. People who rent in big cities where the cost of living is high may need to spend as much as 40 percent of their gross income on rent. However, residents in large cities often use public transportation and don't have the expenses associated with owning a car. So, spending as much as 40 percent of their income on rent may be affordable for their circumstances.

Considerations

    Consider that the typical recommendations for how much people should spend on rent don't include common expenses for food, clothing, utilities and other items. The recommendations also don't consider your take-home, or net, pay. You may want to track all of your expenses for a month to determine what you actually spend from your net pay. Then decide how much rent you can pay without getting into debt over your head.


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