How to Create a Rental Budget - Financial Tips for Tenants

Whether you love financial planning or are part of the 27% who don’t think it’s important, one thing’s for sure: these days, budgeting (and sticking to it) can be a useful tool when you’re looking for a place to rent.

Millions of American renters today are rent-burdened, meaning more than 30% of their income goes to housing costs. A 2022 survey shows that housing expenses are the top expenditure in most U.S. households. This includes rent or mortgage payments, utilities, insurance, taxes, and other costs related to housing.

While we can’t control the economy or rising inflation, your budget is within your control. Having a budget can help to keep you on-track financially and allows you to ensure that your bills are covered, and you’re working toward your financial goals. 

Here are some financial tips to help you start budgeting as a tenant.

Why Do You Need a Rental Budget?

A rental budget helps create financial stability and gives you peace of mind as a tenant. Meeting rent obligations ensures you have a safe and comfortable living place, with the lights, water, and heat. Without a budget, there’s a risk of overspending and potentially jeopardizing your ability to pay for the essentials.

Aside from ensuring you have enough funds for rent and utilities, budgeting helps you to:

• Systematically set aside savings and an emergency fund for unexpected expenses or irregular costs like medical emergencies or car repairs.

• Allocate funds for debt payments or credit card bills, improving your credit score and reducing interest payments.

• Work towards short-term financial goals like saving for a vacation or a new gadget or long-term goals like retirement planning or investing.

• Manage your resources wisely by prioritizing needs over wants.

• Become financially aware and encourage you to question your spending habits and identify areas where you can cut back or improve.

What Is a Budget?

A budget is a financial plan that outlines your expected income and expenses over a given period, typically on a monthly or yearly basis. Budgeting usually involves creating categories for various recurring expenses. 

A clear picture of your earnings is the first step in creating a budget. Calculate your monthly payments from all sources, such as:

• Salary: Your regular paycheck from your job

• Freelance Work: Any income from freelance projects or part-time gigs

• Side Hustles: Money earned from any side businesses

• Investment Income: Income from investments, such as dividends or interest

• Public Benefits: If you receive any government assistance or benefits

• Additional Income: Any additional income

You should also differentiate between fixed and variable income sources. Fixed income includes stable, predictable earnings, while variable income sources fluctuate monthly. A steady income allows you to plan your monthly expenses confidently, but don’t worry if you’re an entrepreneur or freelancer with an inconsistent income. To budget correctly, look at your earnings for the last year or so and get the average. Set aside money from high-earning months to cover your low periods.

Identifying Renter Expenses

When you’re renting or about to rent, there are other costs to consider, such as moving fees, security deposits, and renter’s insurance. The most common expenses for tenants are:

Rent: Your monthly rent payment would be the most significant expense. It’s essential to understand what’s included and to be prepared for potential rent increases. When considering a rental, think about your future plans and financial goals. If you splurge on a three-bedroom rental home with a pool now, you might have less savings for investments or retirement accounts.

Utilities: Utility expenses may or may not be included in your rent, so be sure to ask the landlord. Utilities typically include electricity, water, gas, internet, and cable. Tenants should budget for these recurring costs and consider setting up automated payments to avoid late fees.

Security Deposits: Many landlords require a security deposit upfront, so tenants should take this into account when moving to a new rental. The amount varies according to your location, but it’s usually equivalent to one month’s rent.

Moving Costs: Moving expenses are a hidden cost that renters should prepare for. When moving in and out of a rental, you might have to shell out for professional movers, packing supplies, and transportation expenses. Budgeting for these costs can make the transition smoother.

Renter’s Insurance: Many tenants believe that their landlord’s insurance extends to their belongings as well, but that isn’t the case. If a thief breaks into your rental and takes valuable items, you’d have to bear the replacement costs if you’re not insured. Not all landlords require renters’ insurance, but with the average renters insurance costing about $14 a month, it’s an expense that’s almost always worth it. Renters insurance provides coverage for a tenant’s personal belongings and liability protection. It offers you peace of mind and financial security in case unforeseen events like theft or accidents happen.

Here’s more information on The Benefits of Renter’s Insurance: Protecting Your Belongings and Liability.

Furniture and Appliances: Some rental properties may come unfurnished, requiring tenants to purchase furniture and appliances. You can prioritize essential items and consider buying second-hand or affordable options to help manage these expenses.

Maintenance and Repairs: While landlords are responsible for major repairs, you may have to cover minor maintenance costs. Budgeting for these expenses helps in maintaining the property and ensuring a safe and comfortable living environment.

Late Fees: Read the fine print regarding late fees and penalties on your rental agreement. Setting up reminders or automatic payments can help you avoid unnecessary extra expenses. 

Parking and Transportation: Depending on the unit’s location and your rental agreement, you may have to pay extra for parking. You should also evaluate how much you’ll be spending on gas, car maintenance, or public transportation. If the rent is cheap, but it’s a thirty-minute drive to your workplace, you have to factor in the cost of taking your car to work.

Home Security: Tenants who are concerned about security may invest in home security systems such as cameras, sensors, or additional locks. If your landlord doesn’t provide these, you may have to purchase them yourself if you feel like it will contribute to your peace of mind and personal safety while living in the rental.

The costs above are specific to renters, but there are still other expenses you have to budget for, such as:

• Food and groceries

• Healthcare expenses like health insurance premiums, co-pays, and medications

• Education costs

• Savings for emergency funds, retirement contributions, and investments

• Debt repayment for credit cards, student loans, personal loans, and other outstanding debts

• Entertainment costs for movies, hobbies, events, and subscriptions

• Clothing purchases and maintenance

• Gifts and special occasion expenses

• Holiday or travel expenses

Creating Your Rental Budget

There isn’t a one-size-fits-all way to set a rental budget. It depends on your income, priorities, and current financial situation.

A twenty-something paying off student loan debts may not want to spend a huge chunk of their income on rent alone, while a fifty-year-old empty-nester may be able to afford a rental with all the bells and whistles.

You may have heard of the 30% rule or the 50/30/20 rule when it comes to budgeting. The 30% rule says you shouldn’t spend more than 30% of your income on rent. But with the rental landscape today, this simply doesn’t apply to many people.

The 50/30/20 rule, on the other hand, says that 50% of your income goes to needs like rent, utilities, groceries, and medical expenses, 30% for discretionary spending or the fun stuff and experiences, and 20% goes to savings and debt payments.

Holden Lewis, home expert at Nerd Wallet, believes that the 50/30/20 rule allows more room for budget customization. “When you think about that 50% bucket, it just gives you a little bit more flexibility to pay, say, 35% or 40% of your income for rent if that’s what you have to do,” Lewis says.

Remember that the rental you choose will have a significant impact on your finances and your overall sense of well-being. As soon as you sign the lease, you commit to paying all the obligations that come with your new rental home. 

Deciding which rental to choose? Read Questions to Ask Yourself Before Selecting a Rental Unit to Live In.

9 Money Saving Tips for Tenants 

The cost of living is on the rise, but fortunately, there are some things you can do to save on rent and cut down your utility bills. 

Here are a few tips for reducing your bills:

1. Consider Staying Put Longer

When looking for a rental, consider opting for a longer lease if your landlord presents it as an option. A longer lease may allow you to lock in the rent at the current rate for longer, which could help you to save money in the long run. Of course, this will depend on your lease, so be sure to check the terms of your lease carefully to see how much notice your landlord must give before raising the rent.

2. Consider Roommates

More and more adults today, especially millennials and Gen Zers, live with roommates. A shared living setup can significantly reduce your monthly rent and utilities costs. Just be sure to check that your lease doesn’t prohibit you from having roommates. You’ll need to have your landlord’s approval before you move a roommate in, and in most cases, they may need to undergo the same checks that you did in order to be included on the lease.

3. Look for Move-In Specials

Many landlords and property management companies offer move-in specials or incentives, such as a reduced security deposit or one month’s free rent. Take advantage of these offers when available.

4. Explore Different Locations

If possible, consider renting in a different neighborhood or a nearby suburb if rental options are more affordable there. Housing costs can vary significantly from one area to another so be sure to scout out all available options. 

5. Rent During Off-Peak Times

If you have the flexibility, try to time your lease renewal or move-in date during off-peak seasons when landlords may be more willing to negotiate lower rents. 

6. Look for Energy-Efficient Appliances 

When looking for a rental, consider a unit that has energy-efficient appliances. What if your rental doesn’t? No worries! Just look for ways to use your appliances efficiently. Don’t run the dishwasher until it’s full or wash laundry unless there’s enough for a whole load. Consider swapping out incandescent light bulbs with LED bulbs to reduce your electricity bill, and unplug energy-draining devices when they’re not in use.

7. Set the Thermostat Efficiently

Adjust your thermostat to conserve energy. If your unit has a programmable thermostat, be sure to regulate temperature when you’re away from home.

8. Shop Around for Internet, Phone, and Cable

Regularly shop for better deals on services like internet, phone and cable services. Bundling services may save you money in some cases. Don’t be afraid to ask companies if they’ll give you a deal if you bundle your services through them.

At the end of the day, your budget should help you; not be a burden. So look to create a budget that works for your lifestyle and financial situation and ensure that it’s helpful, and not too restrictive. The best budgets should leave room for you to reach your goals and help you to do those things that are important to you. It should also allow you to take stock of your financial situation, showing you areas where you can make adjustments or cuts, or places where it may make sense to look for additional opportunities to increase your income. With the right approach, you’ll be able to free up your money so that you can use it for the things that matter, freeing you up from having to stress and worry about where it’s going each month.

Want more advice for tenants? Our Renters Warehouse blog has a Resident Resources section packed with helpful tips to make your renting experience as smooth as possible. You can also check out our available rental homes in your area today.