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How Much Should I Spend on Rent? Find Your Answer Here

How Much Should I Spend on Rent? Find Your Answer Here

Renting is a great option for individuals unable to build or purchase a home of their own. Your job could take you places and you’d need convenient and affordable rented accommodation to manage your life.

How much should you spend on rent? Keep in mind that the rent amount varies considerably from one location to the next. So, avoid renting a house that blows a fat chunk out of your monthly paycheck. This is easier said than done, considering how the rent is increasing quicker than incomes in many cities.

However, it’s never too late to bring your finances under control. Never pay too much rent; instead, move into affordable accommodations. Asking the following questions before signing the lease can positively impact your budget:

What amount of home rent can I afford?

Consider your present economic situation as well as your income before settling on the amount to set aside for rent every month.

Thus, when looking for a new place, check your budget to see what expenditures you’re already handling, such as food, insurance and transportation. Pick a location that enables you to reside comfortably, while leaving a sufficient amount left over for paying off loans.

Be aware of the location of the apartment as it will decide the rent you must afford. For example, apartments situated in high-cost rental markets are worth getting a roommate. Even if you are not a big fan of sharing your living space, rooming with another person can save you hundreds, and in some cases, thousands.

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In fact, it might not be a wise decision to rent a place on your own. Landlords in certain areas desire tenants whose annual income is minimum 40 times greater than the monthly rental fee. What this means is, to get a $2,500 apartment, you will have to earn at least $100,000 before taxes.

However, having a roommate lets your split the cost while a guarantor can pay the rent on your behalf if you risk defaulting on your payment.

It might be a good idea to crunch numbers prior to viewing potential housing units. After all, your rent budget will depend on the monetary amount you’re paid after deducting taxes. Simply checking your annual salary before meeting a landlord or a broker might land you in hot water later.

Make sure you take moving costs into account, along with furniture-related expenses. A secret stash for emergency situations might also be a good idea.

What is the 30 percent threshold?

Now, it is true that every person has unique social, personal and financial circumstances. Despite all this, don’t exceed 30 percent of your household income when it comes to rent and utilities.

For that reason, rent a house that costs way below 30 percent of your gross monthly income. So, a person earning $3,000 each month, should keep aside no more than $900 when it comes to housing-related expenses.

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You might be wondering what’s so special about 30 percent. Well, you’ll be surprised to know that this is the percentage used by the government to decide who is qualified to enjoy public housing initiatives and programs since the year 1981.

Statistically, households spending over 30 percent on housing expenses become cost-burdened. Those shelling out 50 percent or more of their salary on housing costs are deemed severely cost-burdened.

A 2015 report from the Harvard Joint Center for Housing Studies found that 21.3 million cost-burdened renters exist as of 2014. So, nearly half of all these people are exceeding their rent capacity.

However, given that so much time has passed since 30 percent became the standard measure of housing affordability, many question the validity of this number. Critics claim it overlooks the variations in household size and cost of living.

Single individuals without dependents might not have an issue paying 30 percent of their monthly income on housing, but a person supporting a family of four might not have sufficient money to get by.

At the same time, a family might think it is worthwhile to spend the 30 percent on rent costs if it means getting closer to better public transportation or better educational institutions.

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Can I go for the 50/30/20 budget?

If you’re undecided on the rent amount, try the 50/30/20 method.

According to this guideline, renters can spend 50 percent of their take-home pay on monthly essentials like utilities, groceries, transportation, and so on.

Then 30 percent of their after-tax money should be used for non-essentials like entertainment. This 30% should also absorb expenses related to important purchases that make your lifestyle better and more fulfilling.

Right from experiential purchases such as a vacation to the Caribbean islands or a wine workshop, to health and beauty products– everything should fit in to this budget. Considering how we’re in a price sensitive economy, this is easily achievable. The trick is to look for specialized retailers that can fulfil your lifestyle product and service requirements at affordable prices.

So, puzzled whether to bring home cool products? Make some space in this 30%.

The remaining 20 percent would then go towards paying off loans, retirement savings and other financial targets. If you can plan the other two portions better and keep on adding to this 20% segment, you’ll be better off by clearing your liabilities sooner than planned.

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Of course, the 50/30/20 budget isn’t a one-for-all deal. For example, individuals on the cusp of retirement and without any substantial savings might have to cut back on their spending and spend more than 20 percent of their income on retirement accounts.

The big takeaway

In short: the amount to spend on rent is not set in stone; it is variable.

Of course, the above-mentioned models give you a good idea about the percentage of income you should allot for housing.

But when all’s said and done, you need to take a closer look at the budget in hand and consider the goals who wish to fulfill before taking the final call on the rent amount you can afford.

Renting an apartment is all about knowing what’s best for you and exploring the available options. The housing market is booming in various parts of the world, and you need to pick the opportune moment to secure the best rental amount.

But whatever you do, make sure you do not overspend. After all, whether you’re single or a family man/woman, you have other needs that must be met, and those cost a lot.

So, plan carefully and find a worthwhile apartment that not only costs a reasonable sum each month but gives you a chance to increase your long-term savings.

Featured photo credit: Pexels via pexels.com

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Robin Williams

Business Professional, Writer and Blogger

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Last Updated on August 20, 2019

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. And that’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways on how to set financial goals and then actually meet them with ease.

5 Steps to Set Financial Goals

Though setting financial goals might seem to be a daunting task but if one has the will and clarity of thought, it is rather easy. Try using these steps:

1. Be Clear About the Objectives

Any goal (let alone financial) without a clear objective is nothing more than a pipe dream. And this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore if you are saving today, then you should be crystal clear about what it is for. It could be anything like kid’s education, retirement, marriage, that dream vacation, fancy car etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives, however small they may be, that you foresee in the future and put a value to it.

2. Keep Them Realistic

It’s good to be an optimistic person but being a pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going out of the line will definitely hurt your chances of achieving them.

It’s important that you keep your goals realistic in nature for it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said – “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”. And this quote sums up the best what inflation could do your financial goals.

Therefore account for inflation whenever you are putting a monetary value to a financial objective that is far away in the future.

For example, if one of your financial goal is your son’s college education, which is 15 years hence, then inflation would increase the monetary burden by more than 50% if inflation is mere 3%. So always account for inflation.

4. Short Term vs Long Term

Just like every calorie is not the same, the approach towards achieving every financial goal will not be the same. It is important to bifurcate goals in short term and long term.

As a rule of thumb, any financial goal, which is due in next 3 years should be termed as short term goal. Any longer duration goals are to be classified as long term goals. This bifurcation of goals into short term vs long term will help in choosing the right investment instrument to achieve them.

More on this later when we talk about how to achieve financial goals.

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5. To Each to His Own

The journey of setting financial goals is an individualistic affair i.e. your goals are your own goals and are determined by your want to achieve them. A lot of times we get on the bandwagon of goal setting only to realize later on that it was not meant for us.

It is important that your goals are actually your goals and not inspired by someone else. Take a hard look at this step at all the goals you’ve set for after this step, you will be on the way to achieve them.

By now, you would be ready with your financial goals, now it’s time to go all out and achieve them.

11 Ways to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a 2 step process –

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough; and invest those savings wisely so that they grow over a period of time to help you achieve goals. So let’s get down to ensuring healthy savings.

Ensuring Healthy Savings

Self realization is the best form of realisation and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your monthly expenses. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you would be surprised to see how small expenses add up to a sizeable amount.

Also categorize those expenses into different bucket so that you know which bucket is eating the most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pump up your savings rate.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classical mistake which almost everyone of us do. We pay ourselves last!

Ideally, this should be planned upside down. We should be paying ourselves first and then to the world i.e. we should be taking out the planned saving amount first and then manage all the expenses from the rest.

The best way to actually implement is to put the savings on automatic mode i.e. money flowing automatically into different financial instruments (for example – mutual funds, retirement corpus etc) every month.

Taking the automatic route will make us lose control of our money and hence will compel us to manage in what’s left with us thereby increasing the savings rate.

3. Make a Plan and Vow to Stick with It

Budgeting is the best to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be made.

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Nowadays, several money management apps and wallets can help you do this automatically. It’s easy and who knows, you may just end up doing what people fail to do.

At first, you may not be able to stick to your plans completely but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Rise Again Even If You Fall

Let’s be realistic. It’s not like the world will come to an end if you made one mistake. This isn’t called leniency but discipline.

If you fail to meet your budget for a month, don’t give up the entire effort just like that. Instead, start again.

Remember that flexible plans are the most realistic plans. So go forward and try to follow your financial goals as planned but if for some reason, the plan gets out of hand for you, do not give up on it just yet. This has a lot to do with your psychology rather than any material commitment.

All you have to do is to stay on the road and vow to stay on it, no matter how much you fall down.

5. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make Savings a habit rather than a goal. While it might seem to be counter intuitive to many but there are some deft ways of doing it. For example:

Always eat out (if at all) during weekdays rather than weekends. Usually weekends are expensive. Make it a habit and you would in turn be saving a great deal.

If you are travelling buff, try to travel during off season. Your outlay will be much less.

If you go out for shopping, always look out for coupons and see where can you get the best deal.

So the key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice which will be harder to sustain over a period of time.

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6. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission. And it would be rather easy to lose the grip over your discipline.

Therefore in order to stay the course, it is advisable that you keep yourself surrounded with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

7. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

So if you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

Use this journal to write down all essential points such as your short term, mid term and long term goals, your current sources of income, your regular expenses which you are aware of and any committed expenses which are of recurring nature.

When you have a written commitment on paper, you are going to feel more energised to follow the plan and stick to it. Moreover, it is going to be a lot more easier for you to follow you and track your progress.

At this point, you should be ready with your financial goals and would be doing brilliantly with savings; now it’s time to talk about the big daddy – Investments.

Making Smart Investments

Savings by themselves don’t take anyone too far. However savings when invested wisely can do wonders and we are at that stage where we will talk about making smart investments.

8. Consult a Financial Advisor

Investments doesn’t come naturally to most of us therefore rather than dabbling with it ourselves, it is wise to consult a financial advisor.

Talk to him/her about your financial goals and savings and then seek advice for the best investment instruments to achieve your goals.

9. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about them.

Just like “no one is born a criminal”, no investment instrument is bad or good. It is the application of that instrument that makes all the difference.

Do you remember we talked about bifurcating financial goals in short term and long term?

It is here where that classification will help.

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So as a general rule, for all your short term financial goals, choose an investment instrument that has debt nature for example fixed deposits, debt mutual funds etc. The reason for going for debt instruments is that chances of capital loss is less as compared to equity instruments.

10. Compounding Is the Eighth Wonder

Einstein once remarked about compounding,

Compound Interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.

So make friends with this wonder kid. And sooner you become friends with it, quicker you will reach closer to your financial goals.

Start investing early so that time is on your side to help you bear the fruits of compounding.

11. Measure, Measure, Measure

All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments; taking stock of how our investments are doing.

If there is one single step where everything (so far) can go wrong, it is at this step – Measuring the Progress.

If we don’t measure the progress timely, then we would be shooting in the dark. We wouldn’t know if our saving rate is appropriate or not; whether financial advisor is doing a decent job; whether we are moving closer to our target or not.

Do measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

The Bottom Line

This completes the list of tips for you to set financial goals and actually achieve them with not so great difficulty.

As you can see, all it requires is discipline. But guess that’s the most difficult part!

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Featured photo credit: rawpixel via unsplash.com

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