By Sabrina Loh
Searching for a new home to rent can be stressful – you spend hours flipping through Pinterest to find the perfect aesthetic, estimate the ideal distance from your favourite haunts on Google Maps, balance factors like amenities and location, question whether you can afford to rent without a housemate, and attend many property viewings.
But the most important thing to consider is — how much rent can you actually afford?
Conventional advice says you should spend 30% of your income on your rent, but there are a few more factors that you should consider first.
The 30% rule
The 30% rule traces its roots back to 1969, and recommends that you spend 30% of your gross income on rent.
For example, if your gross monthly income is RM2800, the maximum you should be paying for rent is RM840.
The problem with the 30% rule
The 30% rule doesn’t take into account your full financial picture, such as debt repayments and other basic necessities.
Let’s say you have monthly car loan repayments of RM300 and car insurance of RM120, which totals up to an extra RM420 that the 30% rule didn’t account for.
That would leave you with only RM1540 (excluding tax and other compulsory deductions!) to spend on food, petrol, entertainment, and savings.
The 30% rule also doesn’t make sense for high earners. For example, if you’re earning RM12,000 a month, the rule would prescribe spending RM3,600 on rent.
Sure you can do that, but paying that much on rent may be an irresponsible practice.
So how much should you spend on rent?
Instead of focusing on spending the ‘right’ percentage on rent, it’s better to focus on how your rent payments fit into your overall budget. If you don’t have a budget, you’ll need to create one.
The 50/30/20 budget allocates your net pay (after all deductions, including taxes, EPF, and SOCSO) to 50% for necessities, 30% for wants, and 20% for savings.
Things such as rent, bills, basic groceries, transportation, and minimum debt repayment fall under the necessities category. Essentially, these are the bare minimum of things that are essential to your survival.
Sticking with the RM2800 example (RM2528 after deductions), if you have a lot of expenses that fall under the needs category, such as RM300 for your car loan, RM120 for car insurance, RM200 for groceries, and RM150 for bills, these expenses total up to RM770.
That leaves just RM494 to spend on rent out of your 50% budget of RM1264 for necessities.
Out of your net pay of RM2528, you’ll have RM758 to spend on your wants (30%) like clothes and dining out, and RM505 to put towards your savings (20%) and extra payments on your debt.
Things to consider
Living further away from the city centre is often less expensive, however, you could incur a lot of transportation costs from commuting. Living nearer to the city will definitely be more costly, but you could end up saving more on transportation costs.
Some condos have on-site gyms and in-unit laundry facilities. This could shave hundreds off your gym membership and weekly visits to the laundromat.
Although living solo has many perks, it also means shouldering the burden of the rent and bills on your own. Considering finding a housemate to split the cost of the rental.
Many people don’t realise that commercial properties come with commercial rates on electricity and water bills. Rent a residential property to keep the cost of your bills down!
The Bottom Line
For many, the 30% rule is a helpful guideline for how much to spend on housing each month. However, it isn’t a one-size-fits-all solution that takes into account one’s full financial picture.
Make your rent payments fit into your overall budget, such as the 50/30/20 technique. Your future self will thank you for not neglecting your savings to spend more on rent!
Tune into the BigPay blog every week to learn more about finance.