How much apartment can I afford? Almost all apartment hunters have asked themselves this question at some point. This post will walk you through how to answer this question.
One of the most challenging parts of apartment hunting is setting a realistic budget. On the surface it may seem like an easy task. Just spend 25% of your gross income, right? That’s what everyone usually says. However, setting your apartment budget can be much more complicated than that, and a one size fits all likely won’t work for everyone.
The 25% rule doesn’t take into account unique financial goals or the disparity between the cost of housing and wages in some cities. That’s why I think everyone should individually evaluate what they are willing to spend on rent each month. If you need help figuring out how much you should be spending on rent, you’ve come to the right place.
By the end of this post, you will understand all the considerations you should take into account when determining how much you can spend per month on your apartment. You will able to use the information in this post to help you decide what you can afford.
This post will help you answer how much apartment can I afford!
Guide to How Much Apartment Can I Afford:
Understanding Your Take Home Pay
When you get an offer for a full-time job, you’re usually told an annual salary. For the purposes of this post, let’s say that you are starting a new job with a salary of $60,000. $60,000 is your gross income. That means it is how much you make before you pay taxes, pay for healthcare, and put money towards retirement.
Most articles you’ve read have probably told you to that you should spend 30% of your gross income on rent. The reasoning behind this approach is that most apartments will approve you based on your gross income. While on paper you may be able to get approved for a certain rate, you may not want to get an apartment that is the maximum price that you can get approved for.
In fact, your take home pay may be substantially less than your gross pay which may make money feel tight. Using the $60,000 example, your gross monthly pay would be $5,000. However, once you take out taxes, health insurance and retirement, your take home would likely be closer to $3,300. Why the big drop? Well let me break it down for you in the next sections.
One of the biggest deductions from your paycheck is taxes. Right now, someone making $60,000 per year would pay 22% of their income to federal taxes. Yes, there are deductions that should be taken into account, but for the sake of simplicity, let’s say you are single and have no dependents. In this case, you would pay about $1,100 in federal income taxes each year.
State income taxes greatly vary depending on where you live. Since I live in Colorado, I’ll use Colorado’s flat income tax of 4.55% for this example. In this case, you would pay about $227.50 per month in state income taxes.
As you can see, after taxes, your paycheck greatly decreases. Unfortunately, there are still other deductions to consider.
Another major expense that is deducted from more full-time employee paycheck is your healthcare premium. Unless you’re extremely lucky, and you work for a company that pays for 100% of your healthcare premium, you will have an certain amount taken out of your paycheck every month to cover your premium. Let’s say you have a high-deductible plan (which usually costs less than PPOs and HMOs) and you only need healthcare coverage for yourself. You could expect to pay about $45 per bi-weekly paycheck. Averaged out that comes to about $98 per month for healthcare.
Finally, no matter what age you are, it’s a good idea to contribute to retirement. Most companies offer some type of match up to a 6% contribution. I always try to contribute AT LEAST as much as I need to max out my company’s contribution since that’s free money. Assuming you contribute 6%, you would be having about $300 per month taken out of your paycheck each month for retirement.
After all these deductions, you would have $3,275 per month after all the deductions. That’s a big difference from $5,000. That’s why I think it’s so important to understand your actual take home pay before you decide how much apartment you can afford.
Understanding Your Financial Goals
In addition to understanding your take home pay, you also need to consider your financial goals. You may have enough take home pay to afford a more expensive apartment, but the amount you spend on rent can also determine how quickly you’ll be able to do other things. Whether your goals include travelling or buying a house or investing money to make passive income, you need to have enough money after rent to save.
How much you save is completely up to you, but I recommend that you write a list of all the goals you want to achieve over the next ten years. Then, do some research and estimate how much all those things will cost/how much money you will need to accomplish them. Add up all the items to determine how much you’ll need. Then, divide up the total cost into the total number of years and then again by 12 to get the amount you would need to save monthly to achieve those goals.
When you are deciding your budget for your apartment, you should consider how much you would like to be able to save and/or invest each month to make sure that your rent payments won’t prevent you from doing other things that are important to you.
Considering the True Cost of Your Apartment
As I discuss in my post on apartment expenses, the amount your apartment will cost you is typically much more than just your rent. From community fees to parking fees to utilities, in most cases you will be paying a couple hundred dollars more than your rent each month to cover these additional expenses.
Generally, I recommend allowing about an extra $150-$200 a month to cover these expenses. Some costs like utilities might fluctuate from month to month depending on the weather. However, it’s a good idea to prepare for the highest amount it could be, so you’re never in a situation where you’re struggling to pay your utility bill.
If you are lucky, you might be able to find an apartment that will include all these costs in the price of rent. This is fairly uncommon, but there are some landlords that will offer this. If you can find a situation like this, definitely take advantage of it. It can really cut down your overall cost of living!
Answering How Much Apartment Can I Afford
Now that we’ve covered all the considerations you need to take into account, I’m going to show you how you can decide for yourself how much you can afford. Using the $60,000 example, we’ve already established that your take home pay would be about $3,275 per month after deductions. With that remaining cost, lets see what else we need to budget for.
As I mentioned before, we have to allow $150-$200 for utilities, apartment fees, internet, and any other costs associated with your apartment. You also need to allow some spending for food. Let’s say your food budget is $300. You also need some money for transportation. Let’s say you own a car with a loan. With insurance, maintenance, and fuel costs, you would be spending on average about $1,000 per month.
After we subtract all those other expenses, you’re down to $1,800 to play with. However, we still haven’t taken into account entertainment and shopping or saving for your future goals. For the purposes of this example, let’s say you have a budget of $200 a month for shopping and entertainment, and you want to save $400 a month. That would leave you with a grand total of $1,200 a month to spend on rent.
When you compare $1,200 to the recommended 30% of your gross income that most places recommend, you’ll notice there’s a substantial difference. Using that recommendation, you would have come to the conclusion that you could afford a monthly rent of $1,500. In this scenario, you wouldn’t have had that extra $400 to save towards your future goals. That’s why I think it’s so important to holistically look at your finances when deciding how much apartment you can afford.
Now that you know how to determine how much apartment you can afford, you might want to look at some other apartment hunting resources. Afterall, you have to find the perfect apartment in your budget right?
Here’s a list of some some great apartment resources:
- Apartment Search Guide: This post will walk you through everything you need to know to start your apartment search. It will help you think through your search parameters. Plus, you’ll understand all the steps of apartment hunting.
- Guide to Apartment Hunting Websites: To find the right apartment, you need to use a good apartment search websites. Having a website that allows you to set all your search parameters will help you find the perfect apartment faster!
- Guide to Apartment Expenses: As I touched on in this post, your apartment expenses will be much more than just your rent. Knowing these expenses before you sign your lease can help you be financially prepared. Plus, it will help you know the right questions to ask when you are touring apartments.
- Guide to Apartment vs Condo: Do you want to understand the difference between an apartment versus a condo? This post will tell you everything you need to know to help you decide which one is right for you.
- Apartment Decor: Once you get your apartment, the fun part comes! You get to decorate your apartment. Check out these awesome posts on home decor to help you get started. Plus, I have lots of great posts on essentials!