# What Are the Rules on your Income to Rent Ratio in Today’s World?

I remember being 16-years old and thinking that moving out from my parents’ house was going to be the best day of my life.  While the freedom was great, what I didn’t know at the time was how expensive it would be.  For almost any person nowadays, rent (or mortgage) is the biggest expense per month that you will incur.

The big question everyone needs to calculate before a major life decision on where to move and how much to spend is, how much can I afford?  This can be figured out by a simple formula if you do a quick internet search.  However, in my opinion, the old school “income to rent ratio” of 30 percent is exactly that, old school and out of date.

You certainly need to budget properly and do your homework to figure out what type of housing you can afford, but I wouldn’t rely on the outdated belief that it should never exceed 30 percent of your monthly gross income.  There are just too many variables that a simple equation can’t account for.

Today I’ll cover a few tips you should follow on figuring out what income to rent ratio works for you, and why the 30 percent rule doesn’t work for everyone.

Full disclosure, if the 30 percent rule works for you, use it, I only ask you to continue reading to see if you agree with a few of my points.  You should always do your research on financial decisions, but don’t ever let one person’s opinion influence your decisions.

• What the 30 percent rule is missing
• How to calculate what income to rent ratio works for you
• Other tips before making a life-changing decision

## Why doesn’t the 30 percent rule work anymore?

There are many reasons why the standard 30 percent rule of income to rent ratio is no longer relevant.  But just to clarify before moving forward, what that means exactly is no more than 30 percent of your gross monthly income should be spent on your monthly rent.

In a scenario where you make \$50,000 a year, or \$4,166 of gross income per month;  30 percent of that figure is \$1,250, which means using the outdated logic, you shouldn’t spend more than that in a month.

The biggest reason I think this model is outdated is that it doesn’t take a deep enough dive into the full financial picture of each individual household.

40 years ago, people didn’t have near the student loan debt that many have today, companies weren’t doing 5-8 percent 401K matches, and the cost of living was totally different.

I know the items listed above somewhat contradict each other, but that is my main point, there isn’t a simple formula to use when calculating a good income to rent ratio.  This is something that is going to be different for every person, couple, or family depending on a thousand different items.

In 1960 (the 30 percent income to rent ratio has been around for decades), there was no person in the world paying \$500 plus a month in student loan debt, and corporations weren’t taking money out of your check for 401K.  Bottom line, there are a ton of additional expenses that today’s generation hold, that could very easily make their attainable income to rent ratio lower than the 30 percent standard.

I get it, as the cost of living has increased and inflation on all products has gone up, so has the living wages.  However, the rate has not been equal, and life is far more expensive today than 50-years ago.  Just ask my dad, he will tell you all about it!

Example – A family has an income of \$50,000 a year as a household.  That means they are bringing in \$4,166 a month and theoretically can spend \$1,250 a month on rent.

If this family has \$300 of utilities (likely a low number), a \$450 car payment, and \$650 a month of student loan payments, that leaves them with \$1,516 a month for everything else they need to survive.

I’m not going to make a ton of assumptions, but factoring in groceries, entertainment, and any type of savings, the math just doesn’t add up.  The family above needs to either find a way to add income or lower their target for the income to rent ratio.

Use the exact same example above and reduce the car payment to \$300 a month and cut out student loan debt.  That now leaves the family with over \$2,300 a month of spending for everything after rent and utilities.  A number that is certainly achievable to live off in most cases.

What about a younger kid with their first job moving to a major city?  Say you’re 22-years old, move to Chicago and start your first job making \$65,000 a year, which is a pretty nice first salary.

That situation equates to \$1,625 a month to spend on rent using the 30 percent income to rent ratio.  I haven’t lived downtown in a major city, but I have plenty of friends who have and know that \$1,625 a month is going to get you 800 square feet and a subway train 9 feet away from your front door.

Again, I’m not a real estate expert and I don’t want that to be the main takeaway from this.  The takeaway I want is that everyone’s situation is completely different, and everyone is at a different point in their life.

A married couple with two kids is going to have to create a budget and stick to what they can spend; they don’t have a lot of room for error as children don’t understand “budget cuts”.  A single guy moving to Chicago has the flexibility to eat ramen noodles for every other meal to be able to afford to live in the city of his dreams.

Don’t ignore the 30 percent of income to rent ratio, but don’t use it as gospel either.  I myself live in a home right now where I’m over the 30 percent rule.  However, I have no student loan debt and one very small car payment.  I also have a scenario where I pay for limited childcare while bringing in two incomes.  All factors of which allow for me to have a bigger mortgage and still have financial freedom.

## How to calculate an income to rent ratio works for you:

Above I covered how the 30 percent mentality of income to rent ratio is outdated, now I want to discuss how you can calculate a ratio that does work for you.  A solution that is able to account for all the variables in your life.

What’s my favorite thing to do? You guessed it, budget!  The first step to understanding how much you can spend on rent a month is to create a budget.  Make sure you understand all your fixed monthly costs and do your best to come up with educated variable costs for each month.

The most important thing to remember is you must budget money for your savings.  In my experience, you want to budget more than you truly want to send to your savings each month.  You’ll get better over time at your budget, but to begin, I can about promise you’ll end up spending five to ten percent over your plan.  It’s extremely difficult to understand to the full extent the money you spend each month until you fully track it.

After coming up with a budget, you’ll have a great idea of what you can afford to spend on rent, and then you can calculate what your income to rent ratio should be.

Again, don’t be embarrassed if you have student loan or credit card debt and you can only afford a ratio of 20 percent.  Everyone’s situation is different, and remember, the current situation of your finances is only temporary no matter how good or how bad they may be.

Another reason that a budget is a tremendous help for figuring out your income to rent ratio; you can also figure out if there are any areas where you can save to increase your max number.  Again, everyone’s situation will be completely different.

For me, with two kids and a spouse, I can’t cut a ton of corners.  I can’t strip down my grocery bill, I must spend money on kids’ clothes as they grow, and I can’t keep my house at 60 degrees in the middle of winter.  I’m a person that just doesn’t have a ton of flexibility on my budget other than eating out and spending on myself.

A single person who wants to live in a major city, they have some flexibility.  If they want to have an income to rent ratio closer to 40 percent or even higher, they can make the budget work.  Eating at home, cutting out shopping, or even getting rid of a car because of public transportation are all ideas to allow their “dream” to come true of living in a big city.

One common rule that I think is a better target is 50 percent of your income towards rent, utilities, insurance, and groceries.  Because there are more categories to shift to your personal needs, it makes more sense to me.  In that same philosophy, you will typically see the suggestion of 30 percent towards personal and miscellaneous items (things you want, but may not need), and then 20 percent towards savings or payments towards any past debt.

This still isn’t a methodology I would use as gospel, but I do think it’s a far better tool if you are looking for some general guidance.  There are still just too many unknowns from household to household to use as a science.

## Tips before making life-changing decisions:

Locking into a lease for a year or moving into a new apartment isn’t necessarily a life-changing decision, but it’s still likely your biggest expense of the month.  We have already covered why the 30 percent income to rent ratio doesn’t always apply, and a few tips to help you calculate an accurate income to rent ratio.  Now I want to cover a few last items to always cover before a major decision.

One big thing to remember is thinking about all the “hidden costs”.  I use hidden because they are things you may not think of if you’re just coming up with a rough number in your head.  One big item would be a deposit.  Usually, when you move into a new place, they require at least one month’s rent upfront, and some will require a deposit on top of that.  If you have a pet, there could be even more additional costs upfront.

A second major hidden cost that hit me hard when moving from my first place to second was the increase in utilities and insurance.  My place was bigger, so it took more energy to heat, more electricity to provide light, and more costs to have proper insurance.  These may all seem like minor changes, but it could be a few extra hundred dollars a month depending on the upgrade or change you are making.

It doesn’t matter if it’s rent or a mortgage, most Americans aren’t at a point where they are saving more money than they know what to do within a month.  That being said, tracking all of these small details just makes life easier after making a change.

My last tip is building an emergency fund.  That means money that can’t be touched unless an absolute emergency occurs like losing your job.  That doesn’t mean if a new computer comes out that you think you need; you go buy it.  Emergencies include rent, food, and necessary clothing.

While calculating your income to rent ratio, you should also make sure you are building in a 3-month (give or take) emergency fund.  It’s a lot to save and can be stressful, but I promise you won’t have any regrets about this strategy.

This, like everything, will be different for everyone.  I always have at least three months of emergency funds because I have two children.  As mentioned before, slashing my budget isn’t that easy.  A single person or a household without kids may be able to get away with six to eight weeks of an emergency fund.

Just remember, the more you spend on rent and the less you put in savings, and the bigger of an emergency fund you will need to create.

At the end of the day, there is just no science to creating the appropriate income to rent ratio, and that’s coming from someone who always wants exact answers.  As with anything, the key is to plan and be honest in the plan.  If you are someone that likes to eat out, you either need to make a life change or plan accordingly to know your income to rent ratio may be less because of that luxury.

The key is building a plan, making sure you agree to the plan and include all details, and then sticking to the plan.  If you do all that (which is no easy task), you give yourself an extremely high chance of being successful, and having that emergency fund gives you even more room for error.

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