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Rent reality check. How much can you really afford?

giphy-4By: Jess Perez

Figuring out how much you can afford in rent as a freelancer when you have a variable income is a tricky equation. It’s like that hilarious Louis C.K. episode where he goes in to talk to his accountant about wanting to purchase a 17 million dollar home. “I had a good year”, Louis says. His accountant reacts, “Do I really need to explain to you why you can’t buy a 17 million dollar house?” After going over his assets and savings with Louis, the accountant clarifies, “You have less than ten times less than one mortgage payment on this house…Right now you could buy a house that costs 7 thousand dollars.” I love this episode because it highlights the disparity between what we optimistically think we can afford as freelancers and what we realistically can.

So how much can you afford in rent when you a) don’t know how much money you will make in a month and b) don’t know when payments for jobs will come through? The truth is that most financial answers for freelancers are somewhat imperfect. The following is the method I as a freelancer use to get to that number. It differs from the advice given by financial experts so take it with a grain of salt.

1. Average out how much income you’ve made over a period of 6 months. Look at your last  6 months of paid income (money that’s actually made it into the bank), as this number will most likely reflect what your numbers will look like in the near future.

2. Figure out on average, how much you’re spending a month on fixed expenses. Fixed expenses are those you can’t adjust month to month, like health insurance. Don’t include rent yet in this number.

3. Figure out on average, how much you’re spending on variable expenses, like clothing and food.

4. Using these numbers, subtract your average monthly expenses from your average monthly income. Look at how much money you have left over.

5. Decide whether you want to allot everything that is left over to rent or if you have other financial goals in mind.

6. If you have other goals, prepare yourself to live below what these numbers tell you that you can afford.

7. If you don’t have other financial goals, make sure you still leave yourself some wiggle room for slow work months. That is, don’t spend absolutely everything you have left over on rent.

Here are a couple more general rules of thumb that are often given by financial experts to help work out how much rent you can afford.

The 30% income rule

This rule encourages people to not spend more than 30% of their income on rent. For freelancers, this 30% should be your average monthly paid take home income. It’s also worth noting that where you live also plays a major role in whether 30% is actually a sound number or not. For example, in cities like New York where the standard of living and cost of real estate is high, many people spend closer to 50-60% of their income on rent.

The 50/30/20 guideline

This guideline states the % by which you should divide up your income pie. It recommends that you first allocate 50% of your income to fixed expenses (rent, health insurance, electric/gas bills, gym membership etc). For freelancers, use your average monthly paid income number to calculate this. It then recommends you spend 30% on variable expenses (clothing, eating out at restaurants, groceries, entertainment, etc) and 20% on financial goals (starting a retirement account, paying down credit cards, saving for an emergency fund,etc).

Of these general rules of thumb, I think this one is the safest one for freelancers to use since the standard of living of the city you live in can greatly affect the first rule. I also like this one the most because I think financial goals are within our reach when we purposely assign a target for them in our financial planning.

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