Great Savings 13: Cut The Cost Of Rent

 

 

This apartment is nice, but I don't need the facilities. That can save money.

It may not be a villa, but as cheap rent goes it has a pool.

 

How much of your income should you spend on rent? 20%? 25%? 35%? The trouble with any formula that gives a specific guideline is it rarely takes into account differences in lifestyle or other considerations like location. For example, it’s far more expensive to rent in a big city than out in the country, yet if your work is in the city living in the country may not be an option. Still, as rent eats up a significant portion of most family budgets even a relatively small reduction in the monthly total spent can add up to tens or even hundreds of thousands over the years.

 

Thinking Big Picture

 

It's not a matter of a simple formula. It's about thinking more consciously.

We encourage anyone trying to get out of debt or build wealth to make all spending decisions more conscious. That means coming up with an overall spending plan. Though this requires both time and thought, the effort can mean the difference between being able to afford a house down the road, fund your child’s education, having money set aside at retirement or perhaps barely scrapping by.

 

To see what a profound difference a spending plan can make assume your family budget is $50,000 (meaning you or you and your spouse earn that much to spend after taxes) and take a look at the following chart.

 

The cost of rent adds up.

Click on the image to expand it. Use your browser button to come back.

 

As the chart shows, the difference in spending half versus a quarter of an assumed $50,000 after tax income really adds up. Cutting the cost of your rent in half like this means you have $12,500 extra available annually to cover other expenses. Or if you put it all into savings, over 30 years the total would accumulate to a tidy nest egg of $375,000—though actually much more if you invest it wisely. That’s a huge sum. In many areas of the country that much money would be enough to buy and pay off an extremely comfortable house. Or it could mean the difference in being able to retire instead of work the rest of your life.

 

What is often hard to grasp as we struggle to get by on a day to day basis is how much our spending choices impact our ability to accumulate wealth over the long-term. Make no mistake: It’s extremely easy to get caught up in the idea we deserve to live in a nicer apartment or home, especially when we see our friends doing it. And sometimes, putting off our short-term happiness just doesn’t seem worth the sacrifice. There are also times when there are valid reasons to spend a little more on rent. For example, to live closer to work so we can cut down on a daily commute or perhaps to live closer to a particular school for our children.

 

 

Today’s example shows what a profound impact a major expense like rent can have on our ability to save money. However, the issue isn’t so much about designing a magic one-size-fits-all formula for spending, but to think consciously about what matters most to you and then to develop a spending plan that supports it.

 

Action Item:

 

Are you in a position to cut back on a major expense like rent in your life? If so, calculate how much you can save over the years by scaling back. Then decide if the savings generated are worth it based on your other lifetime goals.

 

For specific ideas to save money on rent see our post: 7 Tips To Find Nice Affordable Rentals. And to gain a long-term perspective on the goals you want to achieve in life see The Life Timeline: Planning For A Brighter Future.

 

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