You have just landed that new job and you needed an apartment or you just want to move to a new space to practice independence, but the question is how much rent can you really afford?
Investopedia has two answers for that. There is the technical answer; there is also the practical answer. The technical answer depends on the estimates that are according to one of the many rules of the thumb. The estimates are technical since property owners use those to pre-qualify clients if they indeed can afford the rent.
We need to know the rule of the thumb to check whether we can really rent a house:
The 50/30/20 approach.
This suggests that 50 percent of your after-tax income should be spent on fixed cost which includes rent, transportation and utilities. Another 30 percent is spent on our daily expenses and the remaining 20 percent is spent on debt or emergency savings. If you have $7,500 take-home pay, for example, you should be able to afford a space with a $3,125 monthly rent.
On the other hand, the practical answer is calculated based on finances. This begins by organizing your list of household expenses such as transportation, clothing and food. Subtract the total living expenses monthly. What's left then is what you can afford for a monthly rent.
The 30 percent rule.
Given the same example, if you're receiving $100,000 annual income, get the 30 percent of it and divide it by 12 (for 12 months in a year). You should be able to afford an apartment with $2,500 monthly rent.
Now, let's see how practical it would be to rent a house with that cash on hand. Are you sure you are willing to pay that amount every month? Apartment Therapy admits finding all necessities including your rental within your budget can be a bit more difficult. So, what's the practical step to take?
Weigh things out. Check if the expenses are comfortable for you.
Apartment Therapy suggests that you need to see whether you are comfortable to spend a higher proportion of your salary on your rent. It is not easy to always lose a large portion of your salary for something that cannot be yours, much less starving your kids, if you have any. Rather than being confident that you have a higher salary and can just manage to pay the rental price, think about the more important things which you can devote your expenses to. After all, you want to work hard for something that is worthwhile. Renting a house is necessary, but renting a very expensive house is another story.