How to Budget for Your First Apartment
Fees and Expenses You Need to Include in Your Budget
Creating a budget to rent your first apartment can be a little tricky, especially if you’re also new to managing your money. Maybe you just graduated from college, got your first full-time job, or have some friends or a significant other willing to split the rent. Whatever the case and however much you want to live on your own, when reviewing your budget, you realize it may be more costly than you thought. However, there are steps you can take to lower costs so your budget accommodates your living arrangement.
Importance of Budgeting for Your First Apartment
Depending on where you live, you might find that renting is more expensive than you originally anticipated. Or perhaps you discover that your salary doesn’t get you as far as you had hoped.
Either way, it’s important to know how to budget for your first apartment —or living situation. You don't want to have to break a lease because you find that you can’t afford rent.
Check your credit score before applying for rental apartments. Many landlords will check your score and look for responsible behavior when it comes to paying your bills consistently and on time. New reporting in 2019 means that utility, cable, and cell phone bills in your name may also be reported to credit bureaus to calculate a new variant of your FICO score, which is being developed to help renters who don't yet have much else on their credit report.
How to Start Your Budget
- Figure out your monthly income.
- Figure out all of your monthly expenses.
- Subtract your expenses from your income to see what’s left.
- Give yourself a small buffer, and that’s how much you have to spend on your living expenses.
If it's your first time living on your own without any financial help, you might have to adjust your expectations and numbers a few times so they are realistic. You likely didn't have to deal with all of these expenses during college or while living with your parents, so give your best estimate for what you’ll spend on each item. For example, you'll need to estimate how much money you’ll spend on groceries, gas, entertainment, and insurance.
Budgets aren’t set in stone and can be modified to reflect your actual living expenses. You can change your budget after paying a few months of expenses and you've compared your actual spending to the budget.
How to Account for Living Expenses
Finding an apartment that includes utilities in the rent can simplify your budget, however, this option isn’t always available. If utilities such as gas, electric, and water are not included in the rent, you will need to factor them, along with other common living expenses such as renter's insurance, into your apartment budget as follows:
- Rent. This amount should stay the same each month for the duration of your rental contract unless you get a monthly rental agreement, which is not binding but also doesn't prevent rent increases. In addition, most rental agreements require at least one to two months of a security deposit, so be sure to account for that as well.
- Electric. Tenants typically pay for this utility. Because you're in an apartment, your electricity bill should be fairly small each month. If you miss any payments, the utility company can turn off your electricity until all fees have been paid.
- Natural Gas. Gas is often paid by the landlord and is not typically expensive. However, if you are responsible for this utility, make sure you are able to make the monthly payments, as the utility company can easily turn off your heat and hot water for money owed.
- Water: Landlords also often pay your water bill. However, in certain cases, you may need to pay for this utility and want to be sure you can make the monthly payments.
- Internet and Cable. You'll be responsible for this charge, and you may be able to get a bundled service from your cable or cell phone provider at a lower rate. Depending on your apartment complex, you may have to pay an installation fee. Make sure to inquire about this fee when shopping for a provider. In addition, cable may be optional if you don't watch much television.
- Renter’s insurance. This covers all of your belongings in your apartment in case of theft or certain types of damage and is usually fairly low-cost. You can cut the cost even more by bundling this insurance with your car insurance coverage. You may also be able to get multiple quotes for renter's insurance to compare costs.
Check out real estate advertisements for rentals in your area to see how they are priced and what utilities are included. This will give you a good idea of available rentals in terms of determining your budget. You can also make an appointment to see some apartments where you can ask questions about utilities, security, and rent.
Also be aware of these common fees that many apartment complexes and landlords charge:
- Pet fees
- Garbage pickup
- Pest control
- Administration fees
Not all apartments come with these fees, however, it's a good rule to ask if they do. Some fees could occur on a monthly basis, while others may be a one-time charge.
You might find you can afford the monthly rent without an issue, but the upfront costs to move, such as security deposits, renter's insurance and administration fees, seem overwhelming. To get a realistic picture of what you can actually afford and to avoid any surprise charges, you should also include these expenses in your budget.
In addition to paying the first month's rent, you will likely need to pay a minimum of one month’s rent as a security deposit. If you use a broker, you might have to pay them another month’s rent as a fee. For example, if you rent an apartment that costs $1,000 per month and you use a broker, you would have to pay $3,000 upfront. Even without a broker, you would need to pay $2,000 upon moving into your apartment.
Some places may give you a break on the security deposit. Instead of a traditional deposit where you get your deposit back as long as there’s no damage, you might be offered a non-refundable deposit for a much smaller amount, like $175.
Unfortunately, if there are damages to the apartment that exceed that amount, you may be on the hook for those at the end of your lease. If you agree to this non-refundable option, make sure you save a little money each month in case you are charged an additional fee at the end of your lease.
If you have pets, you might also have to pay a deposit for them. This amount is typically much smaller than the monthly rent, but it should be included in your budget.
Many management companies require that you have proof of insurance before you move, and it's a good idea to insure your belongings regardless. Renter's insurance is usually $10 to $20 a month, depending on where you live and your type of apartment. Also ask your car insurer if they offer this coverage, as you might get a bundle discount.
Some landlords require that utilities be in the tenant's name. Therefore, you may have to pay a deposit for service, especially if this is your first time paying utilities. Deposits can range from $70 to $150, but as long as you pay your utilities on time, you should receive a refund. You may have to wait a few months to a year. If you continue service with these utility companies elsewhere, you can expect to receive a credit on your statement instead of a payment.
If you want to apply for an apartment, the management company will likely need to run your credit and conduct a background check. You typically have to pay an administration fee for this service of approximately $100, although some companies will waive the fee if they’re offering a special.
How to Keep Costs Down
If you determine that you cannot afford to pay rent for a desired type of apartment or location, you can refocus your goals to gain additional savings.
Consider the location and housing:
- Living in a studio or a basement apartment is likely cheaper than living in a one- or two-bedroom apartment.
- Living near a city center is going to cost more than living on the outskirts of the city.
- Living in the middle of nowhere might leave you with high transportation costs.
Weigh the pros and cons of location and housing to determine an acceptable situation that can accommodate your budget. For example, living near your job or in the city can be the most strategic decision, as you can give up your car and all of its expenses.
How Much Rent Should You Pay?
There’s a popular rule-of-thumb that states your monthly rent shouldn't be more than one-third of your monthly income, and many apartment complexes—and landlords—follow this rule. For example, if you earn $3,000 a month, you can qualify for an apartment that costs $1,000 a month.
There’s another rule-of-thumb that says living expenses shouldn’t exceed around 25% of your salary. Therefore, if you earn $3,000 a month, you should be looking in the $750 range for rent, so that you can cover utilities and still have two-thirds of your monthly income left.
Consider your options and take all of the fees into consideration when choosing an apartment. Not all places are the same, so it’s important to note all of the fees when making comparisons. For example, one apartment may have a lower base rent but higher monthly fees, making it less of a deal.
Run all of the numbers, ask questions, and start saving month-by-month for those initial move-in costs. You'll be ready to move before you know it.