Okay, I’ll admit – rent is a pretty boring topic.
However, housing costs can make or break your finances. It is one of the largest costs we incur and therefore important to get on top of it. Here’s how much you should be spending.
How much should you be spending on rent?
The generally accepted rule is that 30% of your gross income should be spent on rent.
The reason for this figure is that generally paying more than this can indicate rental stress. If you seem to be struggling with your finances, assess how much rent you pay as a percentage of your income – this rule is a good baseline to start with.
However, I think this rule should be used as an upper limit, especially if you have a larger income. I’d say a better rule is “as cheap as possible without compromising your values“. For example, my rent is 22% of my (very-average) income. Sure, if I followed this rule I could spend a bit more, however I’m happy with my current situation and would rather put the extra money into investments.
I’m spending more than 30%, is this a problem?
If you’re on top of your finances and putting a little aside each month, I wouldn’t stress about going “over” this rule. Especially if you’re young and live in an expensive city such as Sydney or New York. It can definitely work if you budget wisely and live frugally. However, if you’re living pay check to pay check and always short on money – you’re paying too much.
How can I cut back on rent?
Yes, you can get a roommate to cut down on rent and negotiate with your landlord but I’d say the best way is to sacrifice what you don’t prioritise. The best way to do this is to make a list on what you need and really want – and, stick to that. Don’t let anything else sway you!
I remember when I was choosing my place, I got comments that it wasn’t a “good” place because it was old, very used appliances and just generally a lower quality place. At first, I started to re-consider. I thought “I guess I could pay a bit more to have these nicer things. I guess it’s worth it. Thankfully, I quickly snapped out of it. I really had to ignore people’s opinions and focus on what I wanted. Did I really care about an old place? No. I was fine with it actually.
Sometimes we tell ourselves (I’m guilty of it, too!) “Oh, an extra $50 a week isn’t a big deal”. However, if you invested that money instead, you’d have $40,000 in 10 years* – not a small amount at all.
*Starting portfolio value of $100, 8% rate of return over 10 years