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Renting: Know your limit and live within it

Q: I’m getting ready to leave the comfort of my parent’s basement and live on my own for the first time. I would have left earlier but I just couldn’t afford to do so. I’m making a reasonable salary now and starting to move forward in my career (finally). I want to get this right the first time and not move out and then moved back in again with my parents like some of my friends have done. Can you give me some advice on what to do/what not to do and how much of my paycheque should be going towards rent? ~ Sean

A: Congratulations! Moving out on your own is a big step to becoming financially independent of your parents and taking full responsibility of your financial wellbeing going forward. To make this a positive and lasting experience for you, there are a number of factors to consider before taking this step, the first one being how much rent you can afford.

How to determine how much rent you can afford

Many experts recommend not spending more than 30% of your monthly take home pay on rent. Unfortunately this may not be possible in some of the major cities with extremely low vacancy rates. A better way of looking at how much rent you can afford is to also consider all of the other expenses you will need to pay in addition to rent. Here are some key considerations:

• Do you plan to move close enough to work that you can take advantage of public transportation or will you be driving to work and paying for parking?

• What utilities and other costs will you be required to pay in addition to rent?

• Do you plan to live on your own or share the cost of renting with another person?

• Do you have other financial obligations like student loans, credit card debt or a car loan that you will still be paying while paying rent?

• Will you have the ability to save for other important goals like owning a home and saving for retirement once you move out on your own?

A realistic budget is the best way to go

In addition to answering these questions it will be important to determine your overall costs before you move out. Most first time renters are shocked at how much it costs to live on your own when you take all costs into consideration. The best way to do this is to create a realistic budget that covers your anticipated monthly expenses including the approximate amount of rent you will be paying, other fixed and variable monthly expenses, allocations for seasonal and annual expenses as well as the money you need to set aside for debt repayment. And don’t forget to include renter’s insurance in your budget.

Tips to Save on Bills and Expenses

What if your expenses and rent are higher than your income?

With a clear idea of the total picture of your anticipated expenses for living on your own, does it fit within your income? If it doesn’t you are not ready to make the move just yet. Go back and revisit your expenses to see what changes you can make. It’s always easier to do this in advance of moving out than trying to figure this out after the move has been made. It may make sense to stay where you are for the time being and pay off debt to free up additional funds or downsize your expectations with respect to the place that you can afford to rent.

Interactive Budget Calculator That Helps You Build a Budget

There are “hidden” costs to moving out on your own

In addition to managing your monthly and annual expenses, you will likely need to save up funds to set up your apartment for the first time; utensils, cookware, furniture, bedding, etc., it all adds up. While you don’t need the latest and greatest up front you will need the basics to get started.

Landlords will also require a month’s security deposit in addition to the first month’s rental payment. Utilities may require a security deposit if you do not have a strong credit score. All of these costs need to be taken into consideration and saved up in advance of moving out for the first time.

Saving up for emergencies is essential

Another challenge for the first time renter is not having sufficient savings on hand to deal with life events. Before moving out I would strongly encourage you to set aside the equivalent of three months of living expenses to manage unexpected life events. Life events happen and they typically happen when you least expect them or can afford them. Better to stay put if this is okay with your parents until you have all the funds on hand that you will need.

How to Save Up an Emergency Fund

Once you’ve found a place to rent

In addition to determining if your finances are in order, I strongly recommend that you carefully review the rental agreement in advance of signing a lease so that you know what you are responsible for. Check out the building you plan to live in as well as the neighborhood to make sure it meets your expectations. It’s always good to bring along a friend or family member to get a second opinion on the place you plan to rent so you don’t overlook any existing damage that you could be held responsible for at a later date.

Share Space not Money – Roommates Can Help Make Rent Affordable

If you plan to move in with a roommate, choose them carefully. If they haven’t gone through the same exercise as you to see if they are ready to move out on their own you may find yourself caught in the difficult position of having to pay more than your share of the rent and other shared expenses.

The bottom line on renting and moving out on your own

Advance planning and knowing your financial numbers are critical when determining if you are ready to move out for the first time. This is a big step and one you don’t want to take lightly or figure out as you go along. Getting it right the first time takes some work and patience, but you will be rewarded with the knowledge and comfort that you really are ready for this big step of moving forward with your life.

Related articles:

8 Money Mistakes that Keep You Broke

Is This Missing in Your Plan to Get Out of Debt?

5 Personal Finance Tips Most People Wish They’d Known When They Were Younger

Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email, check www.nomoredebts.org or call 1-888-527-8999.

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