A popular rule of thumb is to spend no more than 30% of your income on rent. So if you gross $4,000 per month, your rent should ideally be $1,200 or less.
Unfortunately, that's not always realistic. If you're in a city with a high cost of living, and especially if you're a young adult earning an entry-level salary, your rent could cost much more than the 30% rule recommends. You might find yourself choosing between spending 40% to 50% of your income on rent, or living with your parents to save money.
When I lived in Los Angeles in my early 20s, I was in this situation. My rent wasn't even that expensive, by Los Angeles standards. But I didn't earn much, so there was a time when I spent about half my income on rent. If you're considering this, here's what it's like and alternative options.
It's nearly impossible to get ahead financially
Money is extremely tight when you spend 50% of your income on rent. Let's say your gross income is $4,000 per month. After taxes, that will likely be in the neighborhood of $3,400. If you're spending $2,000 on rent, that leaves you with $1,400 for food, car insurance, gas, health insurance, and all your other bills.
You'll need to carefully manage your spending just to pay the rest of your living expenses. Going out is something you may be able to do once or twice a month, if at all, and picking up the tab for friends is pretty much out of the question.
You also probably won't have anything left over to save or invest. That leaves you stuck in neutral with your personal finances. You can't start building a retirement fund. You won't be able to save for emergencies, either, so you won't be ready for any surprise expenses.
Now, it is possible to get by like this, at least temporarily. But it's not sustainable. At some point, you'll have an unexpected bill come up. Maybe your car breaks down, or you have a medical emergency. If you don't have any savings, you'll need to go into debt to cover it. When your income is already stretched to the limit, you likely won't be able to afford another debt payment. People often end up borrowing more and getting deeper into credit card debt this way.
The long-term consequences of overspending on rent
Overspending on rent makes everyday life stressful. You always feel like you're living on the edge of a disaster. That's not even the worst part, because the biggest issue is the long-term impact this has on your finances.
Going back to that example above, let's say you make $4,000 per month, take home $3,400 after taxes, and spend $2,000 on rent. With $1,400 for living expenses, you break even every month. You aren't able to save any money. In a best-case scenario where you aren't hit with any surprise expenses, you'll still have nothing saved in a year, five years down the road, and so on.
On the other hand, if you spend $1,200 on rent, you'll be in a much better position. That leaves you with an additional $800 per month. You could, for example, use that as follows:
- $300 per month in fun money to spend how you like
- $250 per month in savings for an emergency fund
- $250 per month in a retirement account
After one year, you'll have a $3,000 emergency fund and $3,000 in retirement savings. If you invest your retirement savings, that money will also grow. Over time, this can make a massive difference in how much you're able to save.
For example, if you save $250 per month toward your retirement for 40 years, you'll have saved $120,000 total. If you invest it and get an 8% annual return, which is in line with the stock market's average performance, you'll have $777,170. Investing your money is a powerful way to build wealth, but you can't take advantage if you have nothing to invest.
How to spend less of your income on rent
I know that spending less on rent is easier said than done. Housing is expensive in most major cities, and wages haven't kept up. In 92% of the largest U.S. metro areas, rent growth has exceeded income growth, according to The Journal Record.
Still, spending 50% of your income on rent doesn't work long term. Not everyone is able to get this to 30%, but it's important to at least take steps to reduce that number. Here are a few options to consider:
- Work on raising your income: This is what worked for me, and what I'd recommend. If you're an employee, see if you can negotiate a raise or find a job with a larger salary. If you're a freelancer or have your own business, look for ways to increase your profits, such as landing higher-paying clients.
- Look for more affordable housing in your area or nearby: You could downsize to save on rent -- there's often a difference of hundreds of dollars per month between studio and one-bedroom apartments. Another option is moving to a less expensive neighborhood.
- Consider getting a place with a roommate: If you don't mind living with someone else, it's usually much cheaper to split a two-bedroom apartment than to pay for a one-bedroom apartment yourself. Plus, you can share the cost of utilities.
All of these options work, so it depends on what's realistic for you. If you can raise your income, that's almost always a worthwhile move to improve your finances. But it can take time, and not everyone has the same wage growth opportunities. More affordable housing, or getting a roommate, could be faster solutions.
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