How much should rent be of income?

You may have heard of the “30% rule.” This refers to the fact that most experts traditionally recommended people not spend more than 30% of their gross (before tax) income on housing costs (such as rent, utilities, etc.).

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Am I Spending Too Much on Rent?

In recent years, the cost of rent in Canada has increased quite a bit in most areas. This is especially true in larger cities. As a result, more and more people are spending significant amounts of money on rent. But how much is too much? That depends on your financial situation.

You may have heard of the “30% rule.” This refers to the fact that most experts traditionally recommended people not spend more than 30% of their gross (before tax) income on housing costs (such as rent, utilities, etc.). This means that if you earn $4000 per month before tax, you shouldn’t be spending more than $1200 a month on housing if you’re following this rule. Unfortunately, depending on where you live, this may be incredibly difficult to do. In cities like Toronto or Vancouver, for example, average rents regularly exceed this amount. So what can you do?

The reality is that following a specific “rule” may not make sense for everyone. That’s because these guidelines don’t take a person’s entire financial situation into account. For example, if you’re spending more than 30% of your income on housing but doing so allows you to live close to your job so you can walk to work (rather than drive or take transit), this situation could still make good financial sense. Whether you’re spending too much on rent depends more on your circumstances and your budget than any guideline or rule can account for.

The Importance of Having a Budget that Works

Instead of focusing on spending the “right” percentage on your rent, it’s often a good idea to look at how your rent payments fit into your overall budget. If you can make the numbers work, avoid debt, and save some money each month for emergencies, then you could still be in a good financial situation even if you’re spending more than 30% of your income on rent.

How to Create a Budget

If you don’t have a budget, you’ll need to create one. Not only can budgeting keep you from spending more than you earn, but allocating and tracking your spending helps you see where your money is going each month. This allows you to adjust your spending so your money is spent on what is most important. The first step in creating a budget is knowing how much you earn each month. Many people earn the same amount every month, but if you don’t, you’ll want to figure out the average and use this number to create your budget. If this is your situation, make sure to put money aside in the months you earn more than the average to help you afford your costs in months you earn less. Once you know what you earn, it’s time to write down your expenses. Some of these expenses, such as your rent, will be fixed costs. Fixed costs don’t change much from month to month. Other expenses are considered variable expenses. These are expenses that can change and that you have some control over. For example, money spent on food is a variable expense. You need to spend something on food each month, but you have some control over how much you spend.

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Debt repayment is another expense you will need to add to your budget. If you have a car loan, a line of credit, or credit card debt to repay, for example, make sure you include these amounts in your monthly budget so you don’t miss any payments. Another category in your budget should be savings. Saving for emergencies is important. Life is unpredictable and you never know when a sudden expense could come up or you could end up in a situation where you won’t earn your regular income (such as a job loss or an extended illness). If you don’t have savings, an emergency could result in you taking on significant debt. No matter how much you earn, try to put a category into your budget for savings. Once you add up how much you spend in an average month on fixed costs, variable expenses, debt repayment, and emergency savings, compare it to how much you earn. Can you fit everything into your budget? If you can, then you’re on the right track. If you’re not able to pay for all your expenses on your current income, look for expenses that you can cut. Can you reduce the amount you spend on food by cooking at home more and ordering takeout less? Can you cut out some subscription services (such as movie streaming services)? Can you modify your cable, internet, or phone plans to pay less each month? Every dollar you can save matters.

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