Congratulations. You’ve landed a new job with an annual salary of $100,000 and you’re going apartment hunting. Your first question is probably: “How much rent can I afford to pay?” That question has two answers – one, technical; the other, practical.
- If you earn $100,000 a year before taxes, you could technically afford $3,000-$3,250 a month in rent.
- A more practical approach that appraises lifestyle, the potential for financial hiccups, and unique expenses may lower than amount.
- Depending on what city or region you live in will also affect the type of residence you can afford to live in.
The Technical Answer
The technical answer to the question of how much you can afford to pay in rent relies on estimates based on one of several rules of thumb. These estimates are technical because property owners use them to pre-qualify you for the rent they believe you can afford.
One rule of thumb involves dividing your pretax earnings by 40. This means that if you make $100,000 a year, you should be able to afford $2,500 per month in rent.
Another rule of thumb is the 30% rule. If you take 30% of $100,000, you will get $30,000. Divide that figure by 12 (the number of months in a year) and the answer – surprise – is $2,500 per month.
There’s also a rule-of-thumb approach called 50/30/20. This guideline suggests you spend 50% of your after-tax income on fixed costs such as rent, utilities and transportation; 30% on day-to-day expenses; and 20% on debt, retirement and emergency savings.
Under this approach, if your take-home pay is, say, $75,000 (taking into account taxes and retirement-plan contributions on that $100,000), spending half on rent, utilities and transportation would amount to $37,500. That works out to $3,125 per month, but the rent allocation will probably be lower to account for transportation and utilities costs.
The Practical Answer
The problem with all technical “rules of thumb” is that they don’t take into account your specific financial situation. Just because a landlord is willing to rent a $2,500 apartment to you doesn’t mean you should sign that contract.
The practical answer requires some calculation based on your finances. The process begins by compiling a list of household living expenses – not including rent.
Utilities – If you’re relocating in an area where you already live, you can likely estimate utilities easily using past bills as a point of reference.
If you are in a new locale, ask co-workers, locals or even potential landlords. Most will be willing to share information with you about the average expected cost of utilities in your area. Make sure you know what is included in a rental payment, too – such as water, gas, oil or electric.
Food and Incidentals – This includes groceries, cleaning supplies and incidental expenses such as toothpaste. If you are not familiar with prices in the area, visit a couple of large grocery stores, price items, and compare that with what you’ve spent in the past to arrive at an expected total.
Transportation – This expense takes into account your car payment and insurance, gasoline, maintenance, parking and tolls. It can also include the cost of public transportation and any other expenses associated with work-related or non-work-related travel.
Communication – This category includes landline, cell phone and/or Internet-use fees. Any means you use to communicate with others should be accounted for here.
Clothing – Clothing costs can be estimated, based on past experience. Alternatively, if you are starting a new job that requires a clothing upgrade – suits instead of casual wear, for example – take that into account as part of your planning.
Debt – Most people have debt. It could be student loans, credit cards or payments on a jet ski. Those payments have to be made and you should plan accordingly.
Be sure to allow for more than the “minimum” payment when it comes to revolving debt such as credit cards. If you can't pay your card balance in full, you should pay it off in the fewest possible months to avoid overpaying on interest.
Retirement and Savings – Don’t shortchange yourself in this department. If you have a company-sponsored 401(k), list the amount you contribute. Also, make sure you hold back funds for a rainy day or emergency savings account.
Renter’s Insurance – Renting an apartment does not eliminate the need to protect your belongings in the event of a loss. Nor does it remove your responsibility to protect yourself from liability in case someone is injured in your new apartment.
Extras – The last part of your living expenses list is for the extras, like cable TV, Netflix, movies, dining out, gym membership or expenses related to hobbies you have. These things are the most flexible part of your living expenses, but you need to list them.
While you’re at it, prioritize these extras. That way, if you find you need to cut expenses, you will have already decided which things are least important.
Do the Math
That doesn’t mean you should actually obligate yourself to that amount. It makes sense to leave yourself a little room to account for expenses you failed to take into account or unexpected expenses down the road.
The Bottom Line
If the actual amount you can afford is well below the amount you get using “rule of thumb” measures, this might be a good time to reassess living expenses and trim or eliminate where possible.
In some big cities, like New York and San Francisco, the price of a rental may take a bigger bite of your budget. If that is the case, you may need to find one or more roommates and/or consider living in a less expensive neighborhood.
Knowing your limits before you search will save time and put you in a new apartment that fits your finances with far less hassle.