You Can Afford Less Rent Than You Think

The rule of thumb in financial planning is that you shouldn’t spend more than 1/3 of your take-home pay on rent (that is, after taxes, pretax benefits, and retirement savings).  In many areas, this is actually quite doable. In other areas though, like Washington D.C., it’s often difficult for a young professional to afford a place in a desirable location within the city.

Rather than saying ‘no’ to living in a desirable place whose cost exceeds 1/3 of your disposable income, we at Community Ladders sometimes say ‘yes’ so long as the increased rent you pay is clearly linked to other areas that you will cut back and save on.  It is vital to your both your brain and your odds of success that this is seen as a tradeoff. Ideally, that tradeoff should be established before you move in.  Once you are locked into your lease, your monthly expenditure becomes fixed, and you are more or less trapped (but, it’s still worth a shot to try to lower your rent!). That’s why establishing this tradeoff, and making that conscious choice, is critical.

To help you in the process, there are ‘how much can you afford’ calculators and sites like Zillow and Craigslist that can give you an idea of what local rents are like. At Community Ladders, we believe in a systematic approach to the search, such as this checklist provided by a friend of our Community.

The economy and housing market being such as it is, in some areas it may make sense to consider actually purchasing a home rather than renting (see this rent vs own calculator). There’s a lot that goes into the decision to purchase a place, but even among our Members we have explored buying a place with people just out of college.

And please, please, please – read your lease entirely before signing.  Twice!

This blog entry is part of our June newsletter offering advice to recent graduates. 

Bill Varettoni is a financial planner and the founder of Community Ladders.