How to decide what you can afford

If you are in your twenties, you are probably making some big life choices. When you move, switch jobs, go to school, get married, have kids…you have to readjust your budget.

No big deal- you already know how to do that! But what if you are about to make a big commitment (signing a lease, buying a car) and you aren’t sure if you can afford it?

Let’s rewind in my life, exactly 13 months ago. I was moving to a new (expensive) city. I had a new income. I had sold my car but I wasn’t sure how much I would be spending on public transportation or cabs (because how was I supposed to know, I hadn’t been there yet!) How much would food be? (turned out my closest grocery by about a half hour was Whole Foods…it’s not called Whole Paycheck for nothing, kids!) Word on the street was that everything is pricier in this city, and I no longer had the luxury of a car to drive to farther, cheaper stores.

When I was house hunting, there was a huge range of rent prices in the areas I could reasonably commute from. Places that looked like dumps to me were $700 (with roommates), while nice one bedrooms were about $1900 (although there seems to be no cap on the maximum amount you can spend on an apartment). But what could I afford? I didn’t want to sign a lease and then have trouble paying rent, but I also had more income coming in than I had in the past and I felt like I could move a step or two up from double wide trailer I lived in when I was 24.

The first thing I did was estimate my take home pay. I knew what my total salary was, but it is always a surprise when you see the amount on your first paystub (oh Uncle Sam, you get me every time). If you forget to calculate in taxes, you can be really up a creek. I used this calculator, and then I subtracted $200 just to be safe.

Then (I really did this because I had no idea) I googled how much of your paycheck should be going to rent. This is an example of a wisely written article that helped guide my choices. The standard response is that you should be paying no more than 30% of your take home income in rent. Sounded good to me, and I could move a step or two up from the dump apartments! Yes!

Spending 30% of my income on rent meant that I ended up in a lovely house with two roommates. Definitely not a dump, but not a luxury one bedroom apartment in the middle of all the action, either. It suited my commuting needs, I was in a safe neighborhood, and I made friends with my roommates. I never had trouble paying the rent.

Even though it turned out that many parts of my new city were more expensive than I had planned, I knew that my fixed costs (rent) were within my budget. Because I am pretty savvy about reducing my variable costs if I must (food, transportation- even utilities) I am mainly concerned with making sure I can afford my fixed costs.

However, some people swear by the 50/20/30 rule for budget planning.

50% of your budget should go to housing, food, utilities and transportation.

20% of your budget should go to your financial goals (savings, emergency fund, retirement).

30% of your budget should go to lifestyle (clothes, gym fees, bars, vacations).

I personally don’t follow the 50/20/30 rule, but it can be a good rule of thumb when you are trying to decide what you can afford when you are going through big life changes. Again, these rules (all budget rules) are just guidelines for yourself. The entire point is to make things easier for you, so that you never have to struggle to pay rent that you can’t afford.

It’s kind of like the Game of Life, except it’s actually real life. And you actually have to live in the house you pick!


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