If you're renting a place to live, it's important you make sure your housing costs are affordable. To ensure that, finance guru Dave Ramsey advises you to spend a maximum of 25% of take-home pay on your total rent payment.
When you are looking around for apartments, Ramsey makes it clear that you need to foot the bill for an additional expense beyond just the money you're paying to your landlord. He said this additional expense should be included in your 25% calculation and you shouldn't skip out on it.
Ramsey believes this expense is crucial for renters
Renters insurance premiums are the added cost that Ramsey thinks are a crucial part of your housing costs as a renter. "Your rent payment, including renters insurance, should be no more than 25% of your take-home pay," the Ramsey Solutions blog reads.
There are some very good reasons why Ramsey thinks renters insurance is so essential that it should be considered a part of your required housing costs when deciding how much you can afford to pay in rent to stay below the 25% threshold.
"Having a rental insurance policy will protect you financially if your belongings are lost or damaged in a catastrophe like a fire, storm, or robbery," Ramsey explained. "Don't count on your landlord's insurance -- that usually only protects their property."
Ramsey also explained that renters insurance is a pretty inexpensive form of insurance coverage. Since premiums aren't very high and you could face serious hardship without coverage, Ramsey said this is definitely "one extra cost you should opt for," when you're renting a place to live.
Is Ramsey right?
Ramsey is absolutely correct that buying renters insurance is important for anyone who is renting a place of their own.
A landlord's homeowners insurance policy will cover the structure of the building, but it does not offer any protection for tenants beyond that. And that's a huge problem.
If you are renting an apartment, chances are good you keep just about everything you own in it. If it is destroyed for some reason, such as a fire that burns down the building, the landlord's rental insurance would not cover any personal tenant property. This means a tenant with no renters insurance coverage would need to pay out-of-pocket to replace everything they own.
Since most people cannot afford to just rebuy all of their stuff if a problem happens in their apartment, renters should get insurance coverage to make sure this is not their fate. Renters insurance should typically include liability coverage too, which would pay for legal bills and damages if someone got hurt in the apartment (or was harmed by a renter's dog) and it was deemed the renter's fault.
Many landlords also require tenants to have rental insurance, so this is yet another reason to buy a policy -- although those who aren't required to have coverage should still make sure they are insured, too.
In this particular case, listening to Ramsey absolutely makes sense. Tenants need renters insurance and this cost should be factored in as part of required monthly housing costs when deciding whether rent on a particular property is affordable.
FAQs
But when you pay rent, “you're not throwing money away,” Sethi tells CNBC Make It. “You're paying for a roof over your head. You're paying for a landlord to maintain your residence and you're paying for the convenience and flexibility of being able to leave at the end of your lease.”
How much should you spend on rent with Dave Ramsey? ›
Yes. You should spend no more than 25% of your monthly take-home pay on rent. Spending 30% or more will mean not having enough room left over in your budget to put toward other important financial goals like saving for a down payment on a home.
Is 25% of income on rent good? ›
“Rent generally should not be more than 25 percent of your gross monthly salary,” says Andy Solari, Realtor Associate at Re/Max Carrier Realtors in Brigantine, New Jersey. “If an individual's income is $4,000 a month, then the rent should be no higher than $1,000.”
How much does Dave Ramsey recommend for house payment? ›
We recommend keeping your mortgage payment to 25% or less of your monthly take-home pay. For example, if you bring home $5,000 a month, your monthly mortgage payment should be no more than $1,250.
Is renting really a waste of money? ›
It's buying patience until you're ready to buy a home. Just because a mortgage payment might be less than rent doesn't mean it's the right time for you to buy a house. There are a LOT more expenses that come with homeownership than the monthly payment.
Why do wealthy people rent? ›
Usually, it's the only option. Even for those who can afford homeownership, it's cheaper to rent in cities like Austin, San Francisco, Seattle, Boston and Portland. Renters have more time and money to build wealth: Renters can get away with having thousands of dollars less in their emergency funds than homeowners.
Why is renting better than owning? ›
Moving flexibility: You have much more flexibility with changing your home and moving around. This is great for individuals not set on living in the same place for years to come. Building credit: Renting can help build your credit if you can't buy yet, or give credit references if you're a good renter and need them.
What is the 50 30 20 rule? ›
The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
What is a good of income to spend on rent? ›
Generally, experts recommend spending no more than 30% of monthly pre-tax income on housing. However, it's not always that simple. According to the U.S. Census Bureau, between 2017 and 2021, over 40% of renter households (19 million) spent more than 30% of their income on rent.
How much rent can I afford making $70,000 a year? ›
How much rent can I afford if I make $70,000 a year? It indicates an expandable section or menu, or sometimes previous / next navigation options. You should aim to spend no more than $1,750 per month on rent if you earn $70,000 a year, according to the 30% rule.
The simple answer to “How much rent can I afford?” Experts recommend renters spend no more than 25% to 30% of their monthly income on rent. So, for example, if you make $60,000 per year, your rent and renters insurance shouldn't go higher than $18,000—or $1,500 per month.
Can my rent be 50% of my income? ›
If you're in a city with a high cost of living, and especially if you're a young adult earning an entry-level salary, your rent could cost much more than the 30% rule recommends. You might find yourself choosing between spending 40% to 50% of your income on rent, or living with your parents to save money.
What is the 28 36 rule Dave Ramsey? ›
Lenders often use the 28/36 rule as a sign of a healthy DTI—meaning you won't spend more than 28% of your gross monthly income on mortgage payments and no more than 36% of your income on total debt payments (including a mortgage, student loans, car loans and credit card debt).
How much house can I afford if I make $70,000 a year? ›
With a $70,000 annual salary and using a 50% DTI, your home buying budget could potentially afford a house priced between $180,000 to $280,000, depending on your financial situation, credit score, and current market conditions. This range is higher than what you might qualify for with more traditional DTI limits.
How much house can I afford if I make $40000 a year? ›
On a $40,000 salary, you could potentially afford a house worth between $100,000 to $140,000, depending on your specific financial situation and local market conditions. While this may limit your options in many urban areas, there are still markets where homeownership is achievable at this income level.
Why is renting sometimes considered throwing money away? ›
Explanation: Renting is sometimes considered "throwing money away" for several reasons including: A) Because renters do not build equity in property: Equity is the value of the property minus the debt owed on it.
Why is rent seeking wasteful? ›
Why Is Rent Seeking Bad for the Economy? Rent seeking can make markets less efficient by creating price disadvantages for consumers or companies. Rent-seeking behavior can also create artificial bars to entry for new companies, stifling innovation.
Why is renting sometimes considered throwing money away on Quizlet? ›
Many experts say renting is like throwing money away because you don't own the place or benefit from any increases in home values.
Is it actually better to rent? ›
Owners come out ahead of In at least seven major cities in California, long-term renting is cheaper than owning a home. Renters save $900,540 on average in California over a 30-year period. in at least 51 U.S. cities. On average, owners saved $175,811 over a 30-year period.
