What Can You Afford? Budgeting For an Apartment

Before you begin looking at apartments, you must first decide what you need in terms of apartment features, and establish a budget for what you can afford. You will then be prepared to focus your apartment search on those areas and units that meet your budget, and make a smart decision when you find the right apartment for you.

It is very important to examine your finances and make a budget. If you sign a rental lease, you are making a financial commitment, so be sure you can afford it. That beautiful new apartment with the expansive view and home theater room may be exactly what you want, but it is not worth going into debt and ruining your finances!

Making a Budget

Making a budget is a matter of two things:

1. How much money comes in, and from where, and
2. How much money goes out, and to where.

Thus the first thing to do is to make two lists: income and expenses. It is usually best to list these as monthly income and expenses. If you have income or expenses that occur on other time frames (e.g., annual), divide these info monthly amounts.

If you are handy with computers and can use a spread sheet, this is a great tool for making a budget. Just make two columns of items, total each up, and compare the end results. If you are not handy with computers, you can do this with pencil and paper.

Your Monthly Income

Your first list is your income sources. Include only those that are reliable, or at least very probable. For the purpose of budgeting, you may wish to exclude income from sources like investments and trusts if you consider those a "next egg" or long term savings.

Your income sources might include:

• After tax salary, wages and tips from your job
• Interest, dividends and capital gains from investments
• Royalties, partnerships, trusts, etc
• Alimony

Be sure to list only expendable income, after taxes, savings, retirement withdrawals, etc. Generally this is the amount you actually receive to deposit into your checking account and can be spent directly.

A great way to find all your sources of income is to look at your financial records and past income tax statements.

Your Monthly Expenses

When looking at your expenses, it helps to organize them as follows:

• Mandatory Expenses
1. Fixed
2. Variable
• Optional Expenses
1. Fixed
2. Variable

By dividing mandatory expenses from optional, you will have a sense of what you might be able to give up if your income does not meet what you wish to spend on rent for a new apartment. You may split some items between mandatory and optional, such as food and recreation (e.g., you could avoid buying expensive prepared foods and eating out, or you could pare down your recreation to only what you need to keep healthy).

A great way to identify your expenses is look back through your checkbook, credit card statements and receipts and see what you actually spent and on what. Also, look at your ATM and cash withdrawals to get an idea of how much "other" expenses you have. Also, as you develop your list, compare the total expenses with your total past expenses to be sure your list is complete and accurate.

Fixed Expenses

Fixed expenses are those expenses that you pay each and every month, year, quarter or other time period. Divide quarterly expenses by 4, yearly expenses by 12, etc so that you have monthly amounts.

Fixed expenses include things like:

• Rent for your new apartment. Estimate your rent and then adjust to fit your budget once it is complete. A good starting point is 25% of your expendable income.
• Telephone, cell phone, Internet and other communications costs
• Auto payments and auto maintenance
• Auto insurance
• Medical/Dental insurance and regularly expected medical expenses (e.g., doctor visits, medications, etc that are not covered by your insurance)
• Renters insurance (this protects you in case of theft, fire, etc, especially if you have possessions that are very valuable)
• Other insurance
• Furniture rental (this may be a new expense if you plan to rent furniture for your new apartment)
• Food
• Clothing
• Transportation (gas, bus/train fare, etc)
• Health and beauty (hair styling/cutting, finger nail care, spa treatments, etc)
• School and child care
• Gym or exercise facility membership
• Clubs, lodges or other memberships
• Union dues
• Alimony or child support payments
• Money you send to help support parents or other family members
• Charity, tithes and other donations
• Storage unit (especially if not all your stuff will fit in an apartment)
• Debt payments (loans, credit card debt, student loans, etc)
• Savings allotment (how much you allocate for long term savings each month)
• Other – estimate how much else you spend each month on miscellaneous items

For many people, food will be 8-15% of your income, health will be 5-19%, clothing will be 5-8%, and entertainment will be 5-10%. Rent expense is usually 20-30% of income.

Remember to mark each of these as "mandatory" or "optional", and for things like food and clothing where some amount is discretionary, split these in two so you can see where you can pare down if needed.

Variable Expenses

Variable expenses are those expenses you pay irregularly, but are still predictable to some extent. Often you will need to make assumptions about timing, and average these to a monthly amount.

Variable expenses may include things like:

• Rental deposits for your new apartment
• Moving costs
• Restaurants
• Entertainment (movies, concerts, theater, opera, nights out, etc)
• Recreation
• Vacations
• Auto repairs
• Toys, bikes, strollers, cribs and other children's expenses
• Major purchases, such as new car, boat, recreational vehicles, appliances, etc.
• Furniture
• Medical and dental expenses (deductibles and expenses not covered by insurance)
• Business investments if you are self employed
• Investments (stocks, land, bonds, etc)
• Legal expenses
• Emergencies (how much you want to set aside for emergencies such as personal or family health issues, loss of employment, natural disaster, etc)

Remember to mark each of these as "mandatory" or "optional".

Calculating and Balancing Your Budget

Once you have the above lists done, total each list (income and expenses) and see how you come out by comparing the totals. In general, you will want your expenses to be at least 10% less than your income so you have a margin for error.

If your budget is not balanced (expenses exceed income), go back through the list of expenses and start to eliminate optional items. Decide what you can really live without or can pare down (and plan to stick to it!).

Cash On Hand

In addition to a monthly budget of income and expenses, you should also consider how much cash you will have on hand for up front expenses such as rental deposits, moving costs, furniture, dishes, utensils and other things you will need when you first move in. You should also set aside cash for unexpected expenses.

Expected Rent Payments

Part of balancing your budget will be the amount of rent and rental deposits you expect to pay. You may discover you have to reduce your expected rent payments, thus limiting your apartment search options.

If you are not sure about how much to allocate to rent payments, do some online apartment searches and see what is out there. Compare your list of apartment wants and needs with your rental budget and see how close you are. You may need to adjust your expectations and budget to bring things in line.

For rental deposits, expect to pay first month rent up front, possibly last month also, as well as deposits that may range from $500-2,000 depending on your market area (more if you have other deposits such as pet damage deposits).

Next Steps

Now that you have a prioritized list of what you need in an apartment, and prepared your budget for an apartment rental, you should be sure you are ready for your search by making a list of questions for landlords. Then, you are ready to look for apartments for rent.