Sunday, July 17, 2016
It is hard to give simple answers to what I perceive as a complex question. Recently I was asked what sort of percentage of her take home pay should a recent college graduate budget for her rent. Of course I had a number in my head, but without knowing any other details any counsel I could give would likely be bad counsel. Instead, I offered advice I consider critical in all situations. Pay yourself first. Put 10% of you take home pay into savings before budgeting the first penny. Avoid debt like the plague. If you consistently spend less than you make over a long period of time, you will find financial freedom. Dave Ramsey recommends 25% as a target allocation for rent. I would be willing to go higher, perhaps 30% or even 33% in some instances. But it all depends. If you are living in a high rent area, like San Francisco, you might not want to live in an apartment or even be able to find an apartment that only consumes 30% of your take home pay. In some rural settings, 25% might provide an excessively opulent house better suited for a family. If your parents gave you a good car, you will have more money available to live in a better neighborhood. If you have a car payment that is consuming 25% of your take home pay, it is likely you won’t be able to afford 25% for rent. If you are a young single woman, you might be more interested in a safe apartment complex than a young man with nothing worth stealing. This would be a greater concern in a city than in a small town or a rural setting, but it is something that should be considered before making a decision. Your choice of rental property will also determine the time and cost of your commute. When I lived in the Washington D.C. area, the cheapest acceptable apartment was about 18 miles away from my place of work. At the height of rush hour, it could take close to an hour to cover that miserably short distance. Using Metro and the bus took even longer. There are other small concerns. Does the cost of rent include any utilities? Almost all apartments include the cost of water. If the complex provides an exercise room and a pool, how much is that worth to your quality of life? Your budget will also reflect your values and your tastes. When I was young and single, my clothing expense was zero during most months. On the other hand, most young women would likely want to budget a percentage of their take home pay for clothing. In the end, creating a budget seems much like squeezing a water balloon. What goes out of one end of the balloon will inflate the other end of the balloon. As long as don’t try to put $2,600 dollars worth of monthly expenses into a $2,500 balloon you will be OK. Your goal is to spend less than you take home after budgeting for all regular monthly expenses and allowing for all irregular expenses, such as insurance and taxes.