You’ve landed a new job with an annual salary of $100,000, and you’re going apartment hunting. What an exciting time! Although your first question might be, “How much rent can I afford to pay?” That question has two answers: one that might be considered more "technical," and one that might be considered more "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 that 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 is also $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 your gross salary of $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 utility costs.
The Practical Answer
The problem with all technical rules of thumbs 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.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
The practical answer requires some calculation based on your finances. The process begins by compiling a list of household living expenses, not including rent.
Compile a List of Household Living Expenses
If you’re relocating to 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 electricity.
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.
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.
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 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.
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 types of 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 an emergency savings account.
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.
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 apartment may require a greater proportion of your budget. If that is the case, you may need to find one or more roommates or consider living in a less expensive neighborhood.
Knowing your limits before your search will save time and put you in a new apartment that fits your finances with far less hassle.