Conventional wisdom indicates that your rent and mortgage payments should be about 30 percent of your take-home income. While this is a good rule of thumb, it may or may not apply to your specific situation. If you want a more accurate estimate of what you can afford in rent, calculate your actual take-home income and reduce it by other expenses and savings goals. The amount left over is how much you can afford for rent.
Salaries and Commissions
The first step to understand your rent budget is to document your income. Base your rent budget on your monthly take-home income, not your total annual salary. For example, if you gross $5,000 a month but only net $3,500, use $3,500 as your basis for figuring your budget. To be safe, exclude annual bonuses from this figure. If you work on commission in an industry that is highly seasonal, you may want to exclude particularly high-commission months from your calculation.
Bills and Obligations
Deduct monthly bills and other obligations from your monthly income. Utilities, car payments, phone, internet, cable, insurance, gas, groceries, registration and student loan payments are the most common bills and obligations you'll incur. Remember to include regular expenses that you only pay on a semi-annual or annual basis. For example, if you get a major car service once a year, prorate the expense on a monthly basis and include it in the calculation.
Deduct monthly incidentals and lifestyle expenses. Since you aren't obligated to make these purchases and you don't get a monthly bill, this can be hard to accurately judge. However, that doesn't make these expenses any less real or relevant to your budget. Calculate how much you spend on average on items like eating out, concerts, clothing, music, books, cosmetics, medicine, gym memberships, toiletries and house supplies. If you're having trouble estimating the numbers, review your bank statements from the last few months to get a realistic idea of what you've spent in the past.
Lastly, deduct an allotted amount of monthly income reserved for emergency funds. How much you budget for this should be based on your income and how much you've already saved up. Financial experts recommend that individuals have an emergency fund of between three and six months of take-home income. For example, if your take home income is $3,500, aim for an emergency fund somewhere between $10,500 and $21,000. If you don't have anything saved in an emergency fund yet, make a goal to put away at least 5 percent of your take-home a month and adjust based on your budget. The amount left over after deducting the emergency fund payments, along with regular and incidental expenses, is what you can safely afford to spend on rent.