How much should you spend on rent?
TL,DR:
- 30% rule may be outdated
- 50/30/20 and other frameworks can be useful
- LGBTQ+ individuals should set aside a bigger buffer
Staying at home with family can be tough for the queer community. Moving out and renting a place is difficult too, since it creates one of the largest expenses in many of our budgets and it’s important to determine how much you can afford to spend. The widely-known rule is that you should aim to spend no more than 30% of your income on housing costs, including rent and utilities.
However, this rule may be outdated.
It stems from a public housing legislation rule in the US from 1969 which set the maximum rent for public housing at 25% of a tenant’s annual income, which was increased to 30% later. Financial commitments now are drastically different from those of the 1960s. It also disregards your entire financial plan – balancing rent, loans and retirement savings, for example, can be really difficult. The rule does not account for the vast differences in what people earn and doesn’t take your personal circumstances into account – you might be working from home and need extra space for a desk and hence a larger budget.
It’s important to consider your individual/family’s financial situation when determining your housing budget and create a realistic budget specific to your needs.
However, if you need a starting point and wish to use the 30% rule, this is how to work the numbers.
Start by calculating your monthly gross income. This is the amount of money you earn before taxes and other deductions. For example, if you earn $60,000 per year, your monthly gross income would be $5,000 ($60,000 divided by 12 months).
Next, consider your other monthly expenses, such as food, transportation, and miscellaneous expenses. It’s important to prioritize these expenses and allocate your funds accordingly. For example, if you have high debts and familial obligations, you may need to allocate a larger portion of your budget to paying off your debts, leaving less money for housing costs.
Here’s an example of a monthly expenses breakdown based on a $5,000 monthly gross income Factoring in CPF, take home monthly pay would be $4,000. This uses a 30% housing budget, with a portion for other obligations which can be anything from your car payments, family to debt repayment:
- Insurance premiums: $500
- Retirement savings/investments: $700
- Cash savings: $100
- Other obligations that are non-negotiable: $300
- Rent and utilities: $1,200 (30%)
- Food and misc expenses (e.g. entertainment, clothing, personal care, fines for not returning your ebooks on time): $1,100
- Transportation: $100
This is just an example, and your expenses may vary depending on your lifestyle and financial goals. This also assumes you’ve set aside an adequate amount of cash for emergencies, that cover minimally 3-6 months of your expenses and liabilities.
Try the 50/30/20 budgeting framework
If you still want percentage-based guidelines to help you organize your spending, try a 50/30/20 budgeting framework.
First, calculate your net income (minus CPF and taxes). From there, set aside 50% of what you pay for rent, utilities, groceries, transportation, insurance, and other life essentials that typically cost the same over the year. Use 30% for non-essentials or expenses that can change from month to month. Finally, use 20% to save and/or pay off your debt.
Using the same example of a $4,000 monthly net salary:
- Essential living expenses: $2,000
- Unnecessary expenses / expenses that can vary: $1,200
- Save / pay off other debts: $800
Placing both frameworks side by side:
| 30% rule | 50/30/20 |
| Rent and utilities: $1,200 (30%) | Essential living expenses: $2,000
|
| Retirement savings/investments: $700 | Variable expenses: $1,200
|
| Insurance: $500 | Save and pay off other debts: $800
|
| Cash savings: $100 | |
| Other obligations that are non-negotiable: $300 | |
| Food and misc expenses (e.g. entertainment, clothing, personal care, fines for not returning your ebooks on time): $1,100 | |
| Transportation: $100 | |
| Total: $4000 | Total: $4000 |
Again, like the 30% rule, a 50/30/20 framework will not work for everyone. It is, however, a good starting point; keeping your essential expenses under 50% will allow your emergency fund to expand further and help you control the pace of your life.
One notable exception is if you want to prioritize repayment. In that case, you might want to try a 70/20/10 budget, where 20% of your net income is spent on active repayment, 10% in retirement savings, and 70% on everything else. As you can see, there are plenty of ways and every financial consultant you speak to will have multiple frameworks.
For LGBTQ+ individuals in Singapore, it’s essential to consider the possibility of discrimination in the workplace and housing market. This discrimination can result in lower salaries and reduced access to affordable rental options. Consider creating a larger buffer for emergencies or other unexpected financial setbacks. E.g. I am personally more comfortable with setting aside 2 months of rent, on top of the usual 3-6 months worth of expenses.
The 30% rule or 50/30/20 framework can be used as a starting point for determining how much of your income you should spend on rent. However, it’s important to consider your overall financial goals when determining your housing budget. It’s a good idea to create a budget and track your spending to ensure that you’re able to cover all the bases and that you’re on the right track.
