Financial planning for renters: How much should you really spend on rent?

When looking for properties to rent, most tenants determine their budget based on the maximum amount they can afford. This can be a risky way to determine affordability and could lead to tarnishing your credit score by a missed or partial payment.

Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa says there is a less risky way of setting a rental budget. “Tenants should also ask themselves how much they ideally want to be spending on a home each month instead of asking what is the maximum they can afford,” he notes.

Typically, Goslett explains that a tenant needs to earn two- to three times the monthly rental amount to qualify for the lease application. They will also usually need to have saved up for a deposit, which is normally around two months ' rent upfront. “This can be a good guideline for tenants, but they should also make sure to tailor that budget to their unique spending habits too,” he says.

Explaining what he means by this, Goslett recommends that tenants carefully consider their lifestyle expenses, like the name-brand shoes they like to buy every so often or the weekend away that they like to plan every other month. “A person can get used to spending on these kinds of lifestyle expenses, so it is important to think about this carefully before signing up for a 12-month lease on a property that will make it impossible for you to continue to afford these kinds of lifestyle expenses,” says Goslett.

After reviewing their budget, a tenant might decide to cut back on their expenses to afford the more expensive rental, but Goslett says that it is important for them to realise this ahead of time, otherwise they might continue to spend and not have enough money to spare by the time their rent is due.

“If you’re not sure how much you can afford, it can be useful to meet with a financial planner and a RE/MAX estate agent. The financial planner can help you work out your budget and a RE/MAX estate agent can then show you what you can get for that budget. As tricky as it might be, it is far better to find a home that you can comfortably afford than to rent a home that will cause you sleepless nights worrying about how you will afford to keep up with the rental repayments,” Goslett concludes.

Here are our top tips for creating a budget as a tenant

1. Calculate Your Total Monthly Income

• Include all income sources: Salary, freelance work, side jobs, investments, etc.
• Net income: Use your net income (after taxes and deductions) for accurate budgeting.

2. Follow the 30% Rule

• Rent affordability: Aim to spend no more than 30% of your net income on rent. This helps ensure you have enough left for other expenses and savings.

3. Create a Detailed Budget

• List all expenses: Categorize your expenses into fixed (rent, utilities, insurance) and variable (groceries, entertainment, dining out).
• Track spending: Use budgeting apps or spreadsheets to track your monthly expenses and adjust as needed.

4. Save for Upfront Costs

• Security deposit: Typically one to two months' rent.
• Moving costs: Include hiring movers, transportation, and packing supplies.

5. Plan for Utilities and Additional Costs

• Utilities: Include electricity, water, and internet
• Extras: Consider other costs like parking fees, pet fees, and maintenance charges.

6. Prioritize Essential Expenses

• Essential categories: Rent, utilities, groceries, transportation, and insurance.
• Cut non-essentials: If necessary, reduce spending on non-essential items like dining out, subscriptions, and luxury purchases.

7. Build an Emergency Fund

• Savings goal: Aim to save three to six months' worth of living expenses.
• Consistent saving: Set aside a fixed amount each month to build your emergency fund.

8. Monitor Your Spending Habits

• Regular reviews: Check your spending habits regularly to ensure you’re sticking to your budget.
• Adjust as needed: Make adjustments if you notice overspending in certain areas.

9. Plan for Unexpected Expenses

• Buffer: Include a buffer in your budget for unexpected expenses like medical bills, car repairs, or emergency travel.
• Flexibility: Be prepared to adjust your budget to accommodate these expenses.

10. Save on Everyday Expenses

• Shop smart: Look for sales, use coupons, and buy generic brands.
• Reduce utilities: Be energy-efficient to lower your utility bills (e.g., turning off lights, using energy-saving appliances).
• Cook at home: Preparing meals at home is generally cheaper than eating out.

12. Plan for Future Goals

• Long-term savings: Set aside money for future goals like buying a home, vacations, or further education.
• Retirement: Don’t forget to contribute to your retirement savings.

13. Automate Your Savings

• Automatic transfers: Set up automatic transfers to your savings account to ensure you save consistently each month.
• Separate accounts: Keep your savings in a separate account to avoid the temptation of spending it.

These tips can help you manage your finances more effectively, ensuring you can afford your rent and maintain a balanced budget.