How Much Of My Paycheck Should I Spend On Rent?

Hi Alexa, I just got my first job in NYC and will be making $32,500. I've heard you're only supposed to spend 30% of your earnings (is that before taxes or after?) on rent. But, that means $812.50 in monthly rent for me, and that doesn't seem to be working out in my apartment search. What's the real max I should be spending on rent from my salary? Where should I be making up that money? Is it okay that I'm not saving in my first few years of working? And, realistically, is it okay if I carry a little bit of credit card debt for a while? How much is acceptable? Can I just pay the minimum balance? Is that going to be impossible to pay off down the line? Help! Marisol, New York, NY (almost!)

Hi Marisol, Great question! I talk to so many people who ask these questions too late — once they’ve already spent far beyond their means and are drowning in credit card debt. That is an incredibly stressful position to be in, so let’s figure out how you can start making smarter decisions now. One of my mentors gave me a gem of advice: Always underspend on your home, and you should get extra breathing room throughout the rest of your budget. Once you allocate the majority of your salary to your apartment, it leaves you very little wiggle room to spend on everything else. (Plus, between work and enjoying NYC, you probably won’t spend much time there anyway!) While I know it can be challenging in an expensive city like New York, you are absolutely right that we recommend targeting 30% for your housing costs. That’s 30% of your income after taxes. Whenever you’re budgeting, I recommend looking at your net income (what you take home after taxes), because those are the dollars you actually have to plan with. Based on your starting salary, that leaves approximately $600 per month for rent. Considering that the average monthly cost of a Manhattan studio is $2,277 (according to the Manhattan rental-market report in October 2014), I know that may feel like a massive stretch. But, I don’t want you to consider credit card debt a viable option. Credit card debt is designed to snowball, and we recommend only using a credit card if you can pay it off in full each month. So, how do you follow your dream of living in the city while also starting your money life on the right foot? There are two levers here — how much you spend and how much you earn.

Start by figuring out ways you can reduce what you spend, like bringing in additional roommates (you can often convert a one-bedroom into a two-bedroom) or moving to a less expensive neighborhood (Manhattan is not your only option). Remember that you can always try to negotiate rental costs, especially when armed with research. Check out resources like PadMapper.com or apartable.com, which features no-fee apartments.

Also think about ways you may be able to increase your income. You can consider babysitting, tutoring, or picking up jobs via websites like Taskrabbit.com, Elance.com, or Flexjobs.com, which give you flexibility and play to your skills.

If you end up spending more on your apartment, what’s most important is to not lose sight of your financial goals — like building an emergency fund and starting to save for retirement. It’s all too easy to use sky-high rent as an excuse. Instead, commit to making progress on these goals, too — even if it means cutting back on other spending choices, like taking cabs or eating out. I’m so happy to see you asking these questions — that confirms how smart you are! Here’s to an amazing (and financially sound) beginning to your NYC life.