Nothing is more exciting than deciding to move out, the fun starts when you start searching for that spontaneous place you will call home. But wait… are you a first-time renter? It can be very tricky knowing how much rent you should pay and can get blinded by dreams, and forget about reality, so let’s take a step back and ask yourself, how much rent can you really afford?
To avoid a stressful decision, here are 5 great tips to get you started.
1. Calculate your income
Grab a calculator, this is all about numbers and setting the right budget based on your income. How much do you make annually?
There are 3 types of income;
- Active income which is generated from trading your time for money; salaries, wages, commissions and consultation services.
- Passive income which is generated by your assets without you actively working for it; business,rental, affiliated marketing and royalties.
- Portfolio income which is generated by selling away investment with profit; capital gains, shares, equity and stocks.
Make sure you have your total annual income figured out for a few years ahead, to ensure stability in the decision to rent your new place.
2. Set your budget
If you’re new to budgeting, figuring out how to manage your money can be overwhelming and you may shed a few tears at the start if you dislike numbers. You need to make difficult decisions on how and where you spend your cash.
An average of 60% of your budget will go to the top three necessities; housing, food and transportation. Be Careful, don’t go too far with this number, because you will need emergency funds, lifestyle costs, credit cards, and other monthly expenses.
Another easy way is to divide your income by 40. Let’s say you make $50,000 dollars a year:
50,000/40 = 1,250
Here you go, this equation states you can afford to pay $1,250 in rent every month.
3. 50/30/20 guideline
A simple rule is the 50/20/30 guideline, many follow it as it is easy, keeps your personal finances simple, and a great starting point if you’re novice in budgeting.
This rule suggests spending your income in the following way:
50% on fixed costs (such as rent, utilities, and transportation).
30% on day-to-day expenses (such as entertainment, dining out, shopping, and other miscellaneous things).
20% on financial goals (like paying down debt, building an emergency fund, and saving for retirement).
For example, if your monthly household income is $10,000, you need to budget $5,000 on fixed costs, $3,000 on flexible spending, and $2,000 on future financial goals. Once you finalise your monthly income, you can budget half of your income towards fixed costs. Now deduct utilities, and other fixed costs from this number, you will know what you can afford on rent.
4. Covered the rent, what else?
Now you know how much rent you can afford vs. your income. But your monthly expenditure on renting doesn’t end here, remember there are many more costs related to getting your own place. Additional costs can include broker’s fee if you used an estate agent, move-in costs logistics, furniture and decor, utilities and many other things. Make sure you have calculated all of the expenses, specially for the first 2 months, where costs will be high due to recent moving.
5. What are you comfortable with?
Here is the tough part; dream vs reality.
At the end of the day, you’ll need to ask yourself what you feel comfortable paying. What is the most you’re willing to spend every month for your dream place? Prioritize between what are your necessities and wants, and always remember ‘wants’ are usually sacrificed. We all yearn to have that posh, cozy and fabulous house, where our friends gather, and create memories, and we call home. However, to avoid any future issues with landlords, which tends to be a long and tiresome process to solve, make sure you have it all figured at your comfort.
You are set! Good luck in finding your new home. Next time you want to settle your rent in 60 seconds, remember Ajar Online offers simple and fast rent payment through SMS and email.