Are you beginning a new stage of your life? Whether you are graduating college and planning on entering the real world, starting a new job in a different city, or even just moving to a different apartment, it can be a very confusing time. All of the decisions you make can have a big impact on your financial future.

One of the most common questions we receive here at Smart Young Investor is: How much should I pay for rent? While there are no hard and fast rules, here are some guidelines:

• The common rule of thumb is to never spend more than a third (33%) of your net income (after tax income) on rent. Obviously your goal would be to find a place you are comfortable with for as cheap as possible, but the 33% guideline is meant so you don’t stretch your budget so far that you are accruing debt monthly because of your rent payments. You can figure it out yourself easily. Take your approximate amount of income after taxes(around .70 x net income) per month, then take 1/3 of that. So if you make $2,000 per month, after taxes that would be around $1,400, and 1/3 of 1400 is around $467, which would be the amount you should spend per month on housing.
• Expected costs of utilities (gas, electricity, water, garbage) should be factored in as part of your rent. That is, once you figure out what 33 percent of your net pay is, subtract what you expect to pay for utilities to find your maximum rent payment.
• This calculation is by no means guaranteed to make you safe financially. There are many other factors that can influence your financial situation. Some to consider:
  • How much you make. If you have a very low income, it is possible that more than 66% of your post tax income will be used on living expenses such as food and medical bills.
  • Whether or not you have a car. Expenses such as gas, insurance, not to mention car payments, can be a significant portion of your income.
  • Children. Do you have to pay for childcare? Saving more might be prudent because of extra expenses from children.