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Course: Personal finance > Unit 6
Lesson 1: Renting vs. buying a homeThe true cost of renting a place
Housing costs are usually your biggest expense, so it’s easy to get overextended. Determine how much rent you can afford and how to plan for additional renting expenses.
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Khan Academy doesn’t provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
The material provided on this website is for informational use only and is not intended for financial or investment advice. Khan Academy assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.
Khan Academy doesn’t provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Want to join the conversation?
- what if i want to spend on wifi and car bills, or the general costs of rent what if I have roommates, or I have to spend on streaming services(5 votes)
- What is the average amount of time that the process of getting a place to rent would be? For ex, say I was going away to college and found renting would be more feasible than dorm costs? Obviuosly, I'd want to have a place before the term starts.(4 votes)
- I have never seen something so unrealistic. Earnings of 40000 are not achievable for many people, and even if, where do you find places to rent for 700? Perhaps a studio flat or houseshare, ok, but not everyone wants to live this way or is too old for sharing.
What about people who earn 20000-30000? How are they going to find anything to rent for 30% of their income? Sounds impossible to me.(2 votes)- OK. You believe that the suggested numbers in the lesson are wrong. It is, indeed, difficult for persons who earn less than $2,000 per month to find a place to rent for only $600 per month.
I think, however, that the course assumes lower middle class and up socio-economic status on the part of those who are taking it. That may be a bad idea, but it may explain the given numbers.(1 vote)
- Why do I spend money on rent if I have a roommate or two?(1 vote)
- So, do you mean that if you take in a roommate or two, THEY pay the rent and you get off for free?
You're going to pay SOME kind of rent. Use that amount as you build your budget.(2 votes)
- For example, if I have $1,400, my expense would be $100, I have $1,300 left over.
If it's too low, I can split the housing expense with my roommates.
If I have $1,400, my expense would be $10 with roommates, I left $1,390 more on my rent.(1 vote)- That just doesn't seem realistic. If the cost of renting the place is $1400, and you split it with one roommate, that will mean your rent is $700. If you have two roommates, that makes it $466. There's no way you can get it down to $10, unless you're REALLY crowded.(2 votes)
- What if I want to spend it on wifi(1 vote)
Video transcript
So you’re thinking about
renting your own place. There are lots of decisions to make, like how close do you want to be to work or to your friends, or to your family? How much space do you need? Are you going to live alone
or with roommates? Once you have a sense
of where you want to live and how you want to live, it’s time to start thinking
about what renting a place will actually cost you
and what you can afford. Now, the two biggest costs you’ll have are going to be your monthly expenses
and your move-in costs. To start, you’ll want to figure out
your monthly expenses, which will help you determine
what you can afford to rent. Then we’ll take a look at
what your move-in expenses might be in another video. So first you need to decide
what your budget will be. A decent guideline
for figuring out what you can afford is something called
the “thirty percent rule.” Basically, you take thirty percent
of your gross income – that is, your entire income,
before taxes — and allocate that
to your general housing expenses – that’s not just the rent, it’s also your utilities, insurance and other costs
associated with your home. It is set at thirty percent so you can still have
some money left over to cover your other expenses and hopefully even save something
while you’re at it. Now, everyone’s situation is different. For instance, if you have student loans or credit card debt to pay off, you might want
to spend less on your housing. Or, if you live in a city
where rents are higher, you might be able to afford more because you can use
public transportation and won’t have the typical costs
that come with a car. But for this example,
let’s stick to thirty percent. So, say we’re looking
at an annual salary of forty thousand dollars. In this case, your budget will be forty thousand times point three, divided by twelve
is one thousand per month. Now, this doesn’t mean
you are going to go right out and look at rentals
listed at a thousand a month— or that really nice place
you see for $1,050. First, let’s think about
some other monthly expenses you’ll have in addition to your rent. The biggest monthly expenses
you’re probably going to have are utilities. That’s your electric,
gas, oil, or other fuels, water, and sewer bills. In some cases
the landlord pays for some utilities, but not others. What you’re responsible for and what the landlord is responsible for
should be spelled out in the lease. Electric bills can vary dramatically. The price of electricity
fluctuates throughout the year, or even the time of day. But, for this exercise, let’s say this averages out
to ninety dollars a month over the course of a year. Your fuel bill
(typically your gas or oil) can also vary dramatically
throughout the year— but for now, we’ll estimate it to be
about ninety dollars a month as well. And if you have to pay for water, that bill might be around
thirty dollars a month. You might also want to think
about getting renter’s insurance. If there’s a fire,
a bad leak, or a burglary, rental insurance can cover
the cost of your belongings, and it can be as little
as fifteen dollars a month. Keep in mind,
these are all general estimates— your local utility
or insurance companies are usually the most accurate source
for this information if you want to figure it out yourself. And, these are just a few
of the basic monthly costs you might encounter with a rental. You might run into extra charges
for other amenities as well. And again,
depending on the lease agreement, you could even be responsible
for additional things — like home repairs. In any case, adding this up gives us
a total of two twenty five for general housing expenses. So, we want to take this and subtract it from the original budget
of one thousand, which leaves seven hundred
seventy five dollars for rent, which may or may not be enough. If it’s too low, one possibility would be
splitting your housing expenses with roommates, leaving you more to spend on rent. So, you can see
there are a variety of expenses