What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community.

How to Calculate Expenses to See How Much You Can Spend on Rent

Original post by Colleen Reinhart of Demand Media

Housing costs eat up a larger percentage of household budgets than any other expense category. Finding safe and reliable housing is important, and given how much time people spend in their homes, shelling out higher rent for a nicer place may feel justifiable for some. There are other life necessities though, and a state-of-the-art kitchen doesn't matter much if you can't afford the food to stock it. Before you sign a year-long lease, do your homework and crunch the numbers so you know how much rent is too much on your salary.

Step 1

Calculate 35 percent of your net monthly income. If what you make varies from month-to-month, work with your smallest paycheck for this exercise. The number you come up with is the maximum amount you can spend each month on all housing costs, including rent, utilities and furnishings.

Step 2

Estimate your furniture and household supply costs. If you need to buy big-ticket items, like a couch or a new mattress, that leaves you with less cash to pay the landlord every month. Divide the total amount by 12 to spread the cost out over the year, then deduct that number from the housing costs figure that you calculated. What's left is what you have free for rent and utilities.

Step 3

Calculate 5 percent of your monthly net income, and subtract that number from the rent and and utilities figure you worked out. Since utility costs are usually between 3 and 4 percent of net income, estimating utility costs at 5 percent is a more cautious approach to budgeting. The number you end up with is the highest rent you can comfortably afford.


Tips & Warnings

  • Look for places below the maximum rent you calculated. The higher your rent, the less you can afford to save for a down payment on a place of your own. Spending more on housing makes sense when you're paying your own mortgage and building your own equity, but not when you're paying someone else's mortgage.
  • Look close to schools to find cheaper rents. Landlords in these areas often charge less, since the majority of tenants are students on tight budgets.
  • Shacking up with a roommate trims your rental expenses significantly, and is a particularly smart idea if you live in a city with high living costs.
  • Negotiate with your landlord and ask for a month rent-free before you close the deal. Some landlords are open to offering perks to secure a reliable long-term tenant. The landlord could say no, but you'll save a bundle if he says yes.



About the Author

Colleen Reinhart began her writing career in 2006. She has worked as a technical writer for numerous companies, including Autodesk, and she worked as a marketing writer for Open Text in Waterloo, Ontario. Reinhart has a Bachelor of Arts in rhetoric and professional writing from the University of Waterloo.