Budgets Archives - Poorer Than You

How Much Should You Spend on Renting an Apartment?

By Stephanie, updated February 17, 2014 8 Comments
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True story: back in July, I got a notice that my rent was being raised. I’d lived in the apartment for almost two years, and they pulled this trick on me the previous year: raising my rent by $104/month.

The first time, I just accepted the rate increase. After all, I’d received a sign-on deal of “$50 off each month’s rent!” when I first moved in, so it only seemed like an additional $54/month rent increase (above the deal wearing off).

But after the second year, they wanted to raise it another $114/month! And actually, they offered an “alternative” as well: to install all new appliances in the apartment, and in doing so, raise the rent $141/month (thanks?).

Since the first rent increase, I’d taken some of the burden off myself by moving my boyfriend into the apartment and splitting the rent a bit. But with the additional rent increases, the question became:

Could we afford to spend an additional $1368-$1692 (total) on rent in 2014?

What about Buying?

In some cases, the adage that “you’re throwing money away when you rent” can actually be true. In other cases? Not so much. If you’ve got money saved up for a down payment, there’s only one way to be sure whether buying or renting will save you money: run the numbers.

Don’t feel daunted by the idea of running the numbers, because The New York Times has a super handy-dandy Renting vs. Buying Calculator which can do most of the work for you!

Do a quick search on Zillow for a place that you would actually be interested in buying (be realistic), then enter the purchase price for that into the Times calculator, along with the rent on apartments you’re looking at (or your current rent, if you’re not shopping yet).

In my case? The calculator spit out a pretty clear answer:

“If you stay in your home for 5 years, renting is better. It will cost you $13,412 less than buying, an average savings of $2,682 each year.”

Ouch! $2,682 more per year – and that was based on a comparison to my raised-rent number for 2014! That means it would be an increase of $4,374 per year. Yeah: that’s not in the cards.

So if you’re like me, and you determine that renting is better than buying (for your situation), now how do you figure out how much you can afford to pay in rent?

Rules-of-Thumb for Calculating Rent Affordability

#1: The Rules Apartment Complexes Use: 33% of Gross Income, or Annual Income Divided by 40

If you’re just looking for a really quick calculation, something very general, these are the rules-of-thumb for you.

Method A: Just take the total you make in a month, before taxes or retirement contributions or anything is taken out of your paycheck, and multiply it by 0.33 to get the maximum rent you can afford. So if you make $50,000 a year:

($50,000 divided by 12 months) = $4,166.66 per month

$4,166.66 times 0.33 = $1375.00 per month in rent, maximum.

Method B: Take the total you make in a year and divide it by 40. In our $50,000/year salary example:

$50,000 divided by 40 = $1250.00 per month in rent, maximum.

I find that Method A tends to overestimate how much you can actually afford, for most people. So why use it? Because it’s the rule that some apartment complexes will use to check and see if you can afford the apartment (as far as they’re concerned). It’s what my last apartment used when I signed the lease, and there are plenty of other leasing companies that use this rule, as well.

So this rule is good for finding the very maximum amount of rent you can consider and hope to be approved for the apartment. But I can tell you that all things considered, $1375/month seems awfully high to me for someone making $50,000/year.

Method B is still a little high, but again, useful because you know an apartment complex might be using it as their formula for what you can afford. So if this is all the calculating you want to do, I recommend Method B. It’s easier math (fewer steps!) and it’s not as overly-optimistic as Method A.

#2: Debt-To-Income Front End Ratio: 28% of Gross Income

If you were buying a home instead of renting, this is one of the calculations that banks might use to come up with the mortgage payment you could afford. So it’s useful for our purposes – we’ll just substitute in “rent” where a mortgage would be!

But wait, there’s more! For this debt-to-income (DTI) “front end” calculation, that number would include homeowners insurance for anyone calculating it for a mortgage. So you should include renters insurance, instead. My own renters insurance costs me about $150/year, so feel free to steal that number as a baseline, if you don’t know what your renters insurance will cost you.

For our $50,000/year ($4,166.66/month) example:

$4,166.66/month times 0.28 = $1166.66 per month total rental costs

$1166.66/month minus $12.50/month renters insurance = $1145.16 per month in rent, maximum.

A pretty simple formula, and the resulting number seems much more appropriate for someone making $50,000/year. But can we find an even better formula?

#3: Debt-To-Income Back End Ratio: Total Debt Payments <36% of Gross Income

We touched on this calculation back when we had this same discussion about how much you should spend on a car. As I noted then, the problem with this calc is that if you apply Calc #2 (DTI Front End Ratio) as well, that leaves only 8% of your income for all debt payments other than housing. This still seems insane to me – are banks assuming no one ever has any student loans or a car payment that’s more than $100/month?

But let’s do the math with our $50,000/year earner example, just to see how it shakes out. To make things easy, we’ll use my exact numbers from my real life for the other debt payments:

$4,166.66/month times 0.36 = $1500/month for all debt payments, including rent

$1500/month
– $194.02 (car payment for a used 2004 Camry)
– $284.52 (student loan payments)
– $12.50 (renters insurance)
– $6.61 (car property tax – yeah, that’s a thing I have to pay in Virginia)
——————–
$1002.35 per month in rent, maximum.

Does that sound reasonable to you? It might – depends completely on the region you’re living in. What it means is that where I’m living (northern Virginia, just outside of Washington, D.C.) you can’t get a studio or 1-bedroom apartment on $50,000/year (without a roommate, and using this calculation, of course).

It also means that a bank would probably not approve me for a mortgage around here, if I were making $50,000 or less, based on my other debts. But in another part of the country, that might be plenty for rent or mortgage payments.

If you’re using this formula, you’ll need to do a lot of adjusting for your own situation. For example, if you don’t have a car (and thus no car payment), but you rely on public transportation, you’ll want to include some or all of what you pay for public transit when you do the math.

And the winning formula is:

Personally, I like rule #2 (DTI Front End, 28% of gross income) the best. It’s a really simple calculation that gives you a realistic answer, fast. I think the formulas in #1 are too optimistic about how much a person can pay, which could leave you renting an apartment you can’t actually afford.

And while I like that #3 takes into account how much you are spending monthly on your other debts, I think that for most people it’ll end up being too restrictive. But, there’s hope for it still – if you adjust the percentage to something that give you a bit more leeway (40% of gross income for all debt repayments, maybe?), you might just find a number that suits you better.

(Photo credit: turkeychik on flickr)

"Know Where the Money Goes" Challenge

By Stephanie, updated August 1, 2008 48 Comments
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“Write down every penny I spend? That would never help me.”
“What a waste of time.”
“I already know where all of my money goes.”
“Tracking every purchase is obsessive.”
“Money is the root of all evil – if I pay that much attention to it, it will consume me.”
“I don’t spend any money!”

All of the above are excuses I’ve heard for not following my #1 personal finance tip. I think they’re all crocks. But hey, that’s just my opinion, based on how much tracking my own spending has helped me the past two years.

Want to prove me wrong? Agree with me and want to prove me right? Want to experiment and see if it could help you? Or maybe you’re just the kind of person that likes to take up random challenges you find on the internet?

No matter what your situation, outlook, financial standing, creed, or political affiliation (I’m looking at you, Libertarians!), I want YOU to take part in my “Know Where The Money Goes” Challenge!

Obligatory Uncle Sam Picture!

How To Participate

Declare your awesomeness! Post a comment on this entry pledging your commitment to track your expenses (all of them!) for the month of August. Using the word “pledge” somewhere in your comment will help keep it out of the spam filter.
Track everything you buy (and how much you pay for it!) for the month of August.

Yeah, that’s really it. On the 1st of September, I’ll make a wrap-up post and I invite everyone to come back and post comments about their progress.

How should you track your expenses? That’s up to you! I use a combination of an Excel spreadsheet and a piece of paper in my wallet for writing down cash purchases. I’ve heard of many people having success carrying a little pocket notebook and using that. A Smart Phone, PDA, or iPhone will work, if you’ve got one. Heck, carve it into stone tablets if that works for you (but I demand you post pictures!).

Already track your expenses? Sweet! Pledge to… keep on doing that! This should be fun, no matter what. We’ll all encourage each other, remind each other, share techniques… and hopefully brag and boast about how awesome we are.

Added bonus: if anyone asks why you’re writing down everything you buy, you can tell them it’s because some girl on the internet told you to. (To which you’ll probably get the response “There are no girls on the internet!”)

Bloggers: Tell your readers to come on over and take the challenge! The more the merrier!

Graduating? Make a Budget Without Hurting Yourself

By Stephanie, updated June 4, 2008 3 Comments
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This article is part of a series called Graduating? which focuses on personal finance advice for fresh college grads.

I hate the word “budget.” Not because I think budgets are bad, but because of the images that the word conjures. A massive spreadsheet with dozens of categories, and the whole thing is just yelling at you, telling you all the things you can’t spend money on. Of course, a budget doesn’t have to be like that, but that’s what people think of – which is why I refuse to call what I do “budgeting.”

Still, if you’re leaving the hallowed halls of academia, and entering into “The Rest of Your Life,” you’re probably thinking that you need a budget right about now. But… uh… where do you start?

Give Yourself Time

No one says you have to come out of the gate with a detailed, perfect budget. In fact, I don’t think you should even try at first. Instead, take 6-8 months and just track how you spend your money – every penny. Let your instincts guide you.

Don’t make any major purchases during this tracking period. Why? A few reasons: first of all, how will you know what your typical spending is if you’re making a bunch of extraordinary, one-time purchases?

Secondly, it’s just smarter not to blow your money yet. A lot of people sign on to a new real-world type job, and they run out to buy a brand new car and fill their apartment with expensive furniture – thinking they can “afford it now.” But how do you know that until you know what your expenses are? Once you’ve got a handle on what you spend on food, entertainment, utilities, and all of the other basics, you’ll know what kind of monthly payments you can afford.

And as a side note on the furniture, you don’t want to drop a ton of money on stuff for an apartment that isn’t going to be your end-all-be-all living space. What if that giant bed or kitchen table you buy don’t fit in your next place? Just get the basics, and get them from Craigslist or Freecycle.

Find Something That Works

Everyone has an opinion on how you should budget – but all that really matters is that it’s something that works for you. Just remember, budgeting is just continuing to track what you spend, but now doing it with goals and targets in mind. There’s a lot of free software to do this, so I suggest you try out all of the free stuff before you plop down any cash on fancier software.

Do It Yourself: Paper or Speadsheet – Simple, easy, clean. I’ve tried a bunch of other stuff, but for now, I stick with my self-made Excel spreadsheet. If you’ve got no idea how to make a budget on your own, there’s a great tutorial in Chapter 10 of the book Debt is Slavery.

Pearbudget – the new version of Pearbudget is online, and carries a monthly fee, but the old downloadable spreadsheet is still available on the website, and it’s free! This is one of best budgeting spreadsheets I’ve ever seen. I definitely recommend it, especially if you aren’t too confident in your Excel skills, and you want something where you just plug in the numbers.

Mint – it doesn’t get much easier than Mint. Put in the usernames and passwords for your online banking, and Mint downloads it all and spits out some awesome graphs on how you spend your money. And it lets you set budgets for the categories. If you feel like tracking your spending yourself is way too much of a chore (and therefore you’ll never do it), Mint is for you.

Save

It’s easy to get caught up in what you’re spending, and forget about putting something aside. But there’s always something worth saving for! No matter what system you use, make Savings a category in it.

The key to saving is to always have a definite goal in mind. Your next car, a down payment for a house or condo, or even smallish things – you have to decide for yourself.

The other thing that tends to trip people up is irregular expenses – the things that come up once or twice a year. Car maintenance, Christmas spending, medical expenses… the nice thing about your 6-8 months of tracking is that about half of these will have come up in your “data” already. Try to think of all the things like this, and just put aside some money each month for it. You’ll be glad you did.

Seem too simple to really work? Well, you’re free to keep on reading – here are some good articles to continue your journey:
The Simple Dollar – Budgeting 101
LifeHacker –Adult Budgeting 101: How to Create Your First Budget In the Real World
Get Rich Slowly – Making Your First Budget

I Don’t Have a Budget

By Stephanie, updated April 17, 2008 19 Comments
This post may contain affiliate links

Budgets are the first thing people think of when I tell them that I’m “into personal finance.” There’s an assumption going around that I’m the Great Supreme Queen of Budgeting, ruling over all of the lesser peons with my Glorious Budget of Power, Puppies, and Being Awesome.

Ok, so, no one has actually worded it like that.

Confession: I don’t use a budget. I’ve tried PearBudget, the simplest of the simple, easy, and awesome budgeting software. And for budgeting software, I like it quite a bit.

But I don’t use it. Sure, everyone once in a while, I open PearBudget up and fiddle with it and put in all the purchases I’ve made since I last played with it. But something always goes wrong. An expense doesn’t fit, or my spending is too erratic from month to month to make any sense within the confines of a budget.

I’m a college student. I spend a random amount of money on textbooks three times a year. I spend a fluctuating amount of money on gas every month. My income is dependent on what part of the school year it is. Often times, PearBudget will commend me one month for spending far less than I earned! Except that the only reason that ever happens is when I know that the next month, I’ve got a lot of expenses and less income. So then budgeting software yells at me the next month for spending more than the income for that month.

Perhaps there’s a piece of budgeting software or some system out there that would work perfectly for me. But I really don’t see any need to go out and find it. I don’t need a budget.

Instead, I just track and plan. I have a simple spreadsheet I made for myself in Excel. I use it to track every single penny I spend. And every penny I earn. I also estimate my future income and expenses for the month, so that I know whether I’m looking down the barrel of a “good month” or a “bad month.” Then I plan accordingly.

That’s it. And it works for me. It’s been working for me for almost two years now. So if you haven’t pulled your financial life together yet because you hate the idea of making a budget, then it’s time to get started. Just track what you spend and what you earn, and after a while, you’ll figure out whether yoy even need a budget at all.