Are You Paying Too Much for Your Rental?

Paying too much for rent will only bring on debt. Yet some fail to make this connection. Such a hefty rent might get paid every month, but there will be nothing left to cover gas, food, utilities.

Before leasing a "financial burden," or just getting by every paycheck, consider the benefits of figuring out an affordable rent for your income level. Why? It comes with twice the rewards: A budgeted rent provides a roof overhead and leaves money for saving and spending.

"The less you spend on rent, the more money you have to put toward your other life's goals," says Beth Kobliner, author of The New York Times bestseller "Get a Financial Life." So perhaps the real question should be not how much should one spend on rent but how little can one spend on rent -- to have safety, comfort and the rest of the American dream.

Housing Budget for Renters: A Rule of Thumb

In the past few years, lower rent has been easier to find as unsold condos were converted to rental apartments, which created a surplus in the rental market. But how do you choose your budget range from among the many listings? Financial experts suggest setting a rent budget based on a percentage of annual income.

The general rule of thumb is to allocate 30 percent of your salary toward your rental. It comes from the U.S. government's subsidized housing policy, last adjusted in 1981. It predicted that by spending 30 percent of income on housing costs, families would still have money left to pay for necessities. Anything over that became a housing burden.

Now, the "30 percent rule" has become an industry-wide standard. Most property managers use this cap when evaluating tenant risk. Lenders use it to judge mortgage affordability.

"I think 30 percent is always a good target," says Kobliner, "but in some major cities, like New York or San Francisco, for example, that's going to be more difficult. That figure might be closer to 50 percent."

One Rental Budget Does Not Fit All

Apart from urban living, other factors such as financial obligations, individual money goals and family size could affect a household's ideal rental budget.

"Everyone needs to find their own magic number," says Stacey Osborne, a D.C.-area financial planner who challenges clients to set a 25 percent housing budget if possible.

To find your ideal rental allowance, Osborne advises taking look at the whole picture: "When you're in between moves, consider all fixed expenses before setting a rent allowance."

Taking a page from the extreme budgeting book, "All Your Worth: The Ultimate Lifetime Money Plan" (by Elizabeth Warren and Amelia Warren Tyagi), Osborne likes the idea of keeping all mandatory expenses -- including housing -- at 50 percent of income.

With only half of income going to mandatory bills, a two-income household is automatically protected if one spouse loses a job. It makes paying bills more manageable in any out-of-work catastrophe -- natural disaster, illness, accident. And it leaves much more for saving -- and enjoying life's activities.

Just be sure your ideal rental budget includes the cost of renter's insurance, a policy that Kobliner strongly recommends.

"If you only have a few valuables," she says, "you may think 'why bother?' But having this will actually protect all your possessions -- TV, computer, clothes, furniture, etc." And she adds, "This policy could also offer you some liability protection inside and outside your home. For example, if someone slips and falls in your apartment, your policy could cover them."

Lastly, don't think your rental money is being thrown away because you're not building equity. Renting can be the smart thing to do, as long as you find your affordable number.

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