Let’s talk about rent, baby: why living cheaply is so important for your financial future

When it comes to money management and budgeting, housing tends to occupy a large portion of the overall pie. For example, the median price for a 1 bedroom apartment in my neck of the woods is around $1400. But how much should one actually spend on rent? Apparently, lots of people want to know, since it’s the second suggested search that comes up when you type that into google.

Screen Shot 2016-07-21 at 19.40.32
This tells me a lot about our priorities as a society.

However, there doesn’t seem to be one specific “magic number.”

Pre-tax or post-tax?

Although the “recommended” percentage is somewhere in the 20-30% ballpark, it varies whether this is supposed to be pre-tax or post-tax income. Mint tells me I should spend no more than 25% of my pre-tax monthly pay in one article, but also recommends not having a debt-to-income ratio of greater than 36% of gross pay when looking to get a mortgage (for this discussion, let’s say monthly mortgage payments are pretty comparable to rent and factor out any hidden homeowner costs). Given that the average medical student graduates with around $180,000 in debt, I’m gonna go ahead and say most residents probably exceed their DTI. Using Zillow’s Rent Affordability Calculator (which asks for my post-tax income), I can afford to spend 41% of my take-home pay to live in my area (this number seems exceedingly high to me). Quicken states that rent should be no more than 25% of gross monthly salary, and for the nihilists among us, Bloomberg thinks the 30-percent rule is a lost cause.

So how do these numbers shake out? My salary is pretty close to that of the average resident, so the figures below should approximate that of PGYs across the nation [sidenote: I love crunching numbers on scenarios like this]:

-Pre-tax salary: $4800.00/month
20%: $960 (self-imposed frugal end of spectrum)
25%: $1200
30%: $1440
36%: $1728 (DTI rec)

-Post-tax salary: $3632.08/month
20%: $726 (self-imposed frugal number)
25%: $908
30%: $1090
41%: $1498 (Zillow’s bold rec)

Depending on who you ask, my rent should be anywhere from $960 to $1728 per month. That’s a huge range! Add in the aforementioned student debt, and it’s easy to see how there could be more month than money once the bills get paid. So what’s a future early retiree to do? In a word…

Roommates.

Yup, the simplest not-so-secret secret to living cheaply is to split the costs with someone else.  MMM did it, Anita did it, and a whole host of other successful FIRE bloggers have done it. I gotta say, I’m on board with that life. I currently pay $800 per month to live in a lovely home that I share with two other people. That’s $600 less than the median amount someone in my town pays for a similar setup! And because of the magic of compound interest, those savings can really add up… $7200/year can become $113k in the span of only ten years.* Although it may not have the Pinterest-worthy opportunities to decorate (and spend) that my own solo space might provide, living in a shared setting allows me to pursue my dream of paying off my debt quickly and retiring early. As a result of saving on rent, I’m able to contribute 28% of my pre-tax income to retirement funds (which actually looks closer to 40ish percent if you count hacking my HSA and the company match–more on what my monthly budget looks like in a future post). For me, financial independence is a priceless gift to myself, and it’s absolutely worth any small inconveniences that come up as a result of having roommates.

Of course, there are plenty of other ways to live cheaply, including cutting commuting costs and deflating your overall lifestyle. This is just one piece of the frugal puzzle–however, it tends to be a pretty significant one in most people’s budgets, so I’ve found it’s a good place to start.

 

 

What percentage of your income do you spend on housing? Mortgage-holders, I want to hear from you, too! Anybody solidly anti-roommate despite the savings benefits?

* assuming a 6% interest rate compounded annually.

 

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