A budget without guidelines is like a game without rules. Guidelines create a framework for making decisions such as what, where, how and when to spend your salary and help you gauge your level of success. Because rent provides no return on your investment and is most likely your largest monthly expenses, guidelines state you should keep this expense within a specific percentage of your salary.
The U.S. Department of Housing and Urban Development estimates you should spend about 30 per cent of your net monthly salary, or your salary after deducting payroll taxes, on rent payments. Rent, according to HUD, includes the cost of utilities such as electricity, gas and water. Calculate this amount by multiplying your weekly, biweekly or monthly net pay by 52, 26 or 12 to get your annual net salary and then divide this number by 12. For example, if your weekly net pay is £312, your annual net pay is £16,224. Following the 30 per cent rule, you should limit monthly rent to no more than £405 each month.
If you remain at or below HUD's 30 per cent recommendation, the agency considers your housing cost burden normal. If you spend between 30 and 49.9 per cent of your salary on rent, your housing cost burden is moderate and if your rent costs are at or above 50 per cent of your salary, your housing cost burden is severe. The U.S. Department of Health and Human Services uses this information to determine how much low-income families qualify for when applying for Section 8 or low-income rent assistance.
Fair Market Rent
Your monthly income and area rental costs determine how well you can apply the 30 per cent rule. Average rental costs, also called fair market rent, tend to fluctuate depending on the state, county and city or town in which you live. For example, as of 2011, the fair market rent for a two-bedroom rental in Hot Springs, Arkansas, is £419 per month. Staying with the 30 per cent rule requires a monthly income of about £1,430. In contrast, the fair market rent for a two-bedroom rental in Philadelphia, Pennsylvania, is £700, requiring a monthly income of about £2,340.
While staying as close as you can to spending no more than 30 per cent of your salary on rent is best to ensure affordability, also consider factors such as condition, safety and location. Balance all these issues when picking a home to rent.