I often hear tenants ask, “How much of my income should I spend on rent?” The first step to answering that question is creating a budget, or as Financial Advisor Dana Twight likes to call it, a Spending Plan.
Twight’s first recommendation for creating a monthly spending plan is to record all income and spending.
When recording income, include wage income, as well any other sources along the way (rental income, refunds, rebates, gift cards, checks from any side gigs etc.).
Next, record both fixed and variable expenses.
What expenses are fixed? These may include rent/mortgage, insurance, tuition, commuting costs (tolls, parking, gas), groceries, utilities, loan payments (student loans, car payments, minimum on your credit card bills, if any), tax withholding, child care, pet care or babysitting costs, condo fees.
What expenses are variable? These may include eating out, any cell/internet/cable costs above the basics, paying extra on any loans or credit card bill, clothing, gifts, personal care, charitable contributions, and entertainment. Vacation spending?
When you are finished recording your current spending, take a closer look at some of the categories and determine if any one category is over represented or if you forgot to account for anything.
Are your residence costs less than 50% of your income (old guidelines were 33-35%)
Savings? Hint: this percentage should not be zero and should be at least 5% of your gross income. 10-20% is better, but is out of reach for many people. You can plan to change that.
Twight is a regular contributor on NerdWallet.com, where you can read her full answer on how to get started with a monthly budget.
In sum, your residence costs – including rent, utilities, internet, cable, or any other housing related costs – should ideally be 50% or less of your total monthly income. But, in order to determine what that amount is, you should create a spending plan.
Twight recommends using the Make a Budget fillable PDF created by the Federal Trade Commission to get started.