Chapter 07: Using the 50-30-20 Rule to Budget

Save more, spend smarter, and make your money go further

So far in this series, we’ve answered important questions about budgeting, such as “What is a budget?” and “Why is budgeting beneficial?” This series has been focusing on how using a budget can help you keep your spending in check and ensure your savings goals are on track.

One way to do that is using Mint’s free 50/30/20 calculator to budget.

The 50/30/20 rule (also referred to as the 50/20/30 rule) is one method of budgeting that can help you keep your spending in alignment with your savings goals. Budgets should be about more than just paying your bills on time—the right budget can help you determine how much you should be spending, and on what.

The 50/30/20 rule can serve as a great tool to help you diversify your financial profile, reach dynamic savings goals, and foster overall financial health.

In this post, we’re taking you through the steps of budgeting using the 50/30/20 approach so that you can learn how to set up a budget that’s sustainable, effective, and simple. Use the links below to navigate or read all the way through to absorb all of our tips on how to budget using the 50/30/20 method:

In the previous chapters, we discussed what to include in a budget and the various ways you can create your own budget, like with a budget template. If you haven’t read through them already, we highly recommend going through them to get a comprehensive overview of budgeting.

What is the 50/30/20 Budgeting Rule?

The 50/30/20 budgeting rule–also referred to as the 50/20/30 budgeting rule–divides after-tax income into three different buckets:

  • Essentials (50%)
  • Wants (30%)
  • Savings (20%)

Essentials: 50% of your income

To begin abiding by this rule, set aside no more than half of your income for the absolute necessities in your life. This might seem like a high percentage (and, at 50%, it is), but once you consider everything that falls into this category it begins to make a bit more sense.

This will include your living expenses each month, which are essential expenses that you would almost certainly have to pay, regardless of where you lived, where you worked, or what your future plans happen to include. In general, these expenses are nearly the same for everyone and include:

  • Housing
  • Food
  • Transportation costs
  • Utility bills

The percentage lets you adjust, while still maintaining a sound, balanced budget. And remember, it’s more about the total sum than individual costs. For instance, some people live in high-rent areas, yet can walk to work, while others enjoy much lower housing costs, but transportation is far more expensive.

How much your essential expenses cost will differ for each person depending on where they live and what their lifestyle is. If you’re thinking of relocating to a different part of the country, it’s a good idea to calculate your cost of living beforehand so you can know if you can realistically afford to live in that area based on your current total income.

Wants: 30% of your income

The second category, and the one that can make the most difference in your budget, is unnecessary expenses that enhance your lifestyle. Some financial experts consider this category completely discretionary, but in modern society, many of these so-called luxuries have taken on more of a mandatory status. It all depends on what you want out of life and what you’re willing to sacrifice.

These personal lifestyle expenses include items such as:

  • Your cell phone plan
  • Cable bill
  • Trips to the coffee shop
  • Savings for travel
  • Gym memberships
  • Weekend trips
  • Dining out

If you travel extensively or work on-the-go, your cell phone plan is probably more of a necessity than a luxury. However, you have some wiggle room since you can decide upon the tier of the service you’re paying for.

Only you can decide which of your expenses can be designated as “personal,” and which ones are truly obligatory. Similar to how no more than 50 percent of your income should go toward essential expenses, 30 percent is the maximum amount you should spend on personal choices. The fewer costs you have in this category, the more progress you’ll make paying down debt and securing your future.

Savings: 20% of your income

The next step is to dedicate 20% of your take-home pay toward savings. This is essentially how much you should set aside from your paycheck each month for savings. This can include different types of savings like:

  • Savings plans
  • Retirement accounts
  • Debt payments
  • Rainy-day funds

These are all things you should add to, but which wouldn’t endanger your life or leave you homeless if you didn’t. That’s a bit of an oversimplification, but hopefully you get the gist. This category of expenses should only be paid after your essentials are already taken care of and before you even think about anything in the last category of personal spending.

Think of this as your “get ahead” category where you can challenge yourself to save. Whereas 50%(or less) of your income is the goal for essentials, 20%—or more—should be your goal as far as obligations are concerned. You’ll pay off debt quicker and make more significant strides toward a frustration-free future by devoting as much of your income as you can to this category.

The term “retirement” might not carry a sense of urgency when you’re only 24 years old, but it certainly will become more pressing in decades to come. Just keep in mind the advantage of starting early is you will earn compounding interest the longer you let this fund grow.

You don’t want to cash out your 401k to be able to pay off debt. The more you put towards savings now, the quicker you can pay off your debt and achieve financial stability.

Use our compound interest calculator to see how your money can grow over time.

Establishing good habits will last a lifetime. You don’t need a higher paying job to follow the tenets of the 50/30/20 rule; anyone can do it. Since this is a percentage-based system, the same proportions apply whether you’re earning an entry-level salary and living in a studio apartment, or if you’re years into your career and about to buy your first home.

A note of caution, though: Try not to take this rule too literally. The proportions are sound, but your life is unlike anyone else’s. What this plan does is provide a framework for you to work within. Once you review your income and expenses and determine what’s essential and what’s not, only then you can create a budget that helps you make the most of your money. Years from now, you can still fall back on the same guidelines to help your budget evolve as your life does.

Give our 50/30/20 budgeting calculator a try to see how this budgeting method works:

50/30/20 Budget Calculator

Here’s how much you have for:

Essentials$0.00

Wants$0.00

Savings$0.00

Ask Yourself: Why is a 50/30/20 Budget Necessary?

According to Consumer.gov, there are plenty of different reasons why people start a budget:

  • To save up for a large expense such as a house, car, or vacation
  • Put a security deposit on an apartment
  • To reduce spending habits
  • To improve their credit score
  • To eliminate debt
  • To break the paycheck to paycheck cycle

Identifying the reason why you’re budgeting with the 50/30/20 method can help you stay motivated and create a better plan to reach your goal. It’s kind of like the “eye on the prize” mentality. If you’re tempted to splurge, you can use your overarching goal to bring you back to your saving senses. So ask yourself: why am I starting to budget? What do I want to achieve?

Additionally, if you’re saving up for something specific, try to determine an exact number so that you can regularly evaluate whether or not your budget is on track throughout the week, month, or year.

How to Budget with the 50/30/20 Rule

To make the most of this budgeting method, consider following the steps below:

Deep Dive Into Your Current Spending Habits

Before implementing a 50/30/20 budget, take a long, hard look in the mirror (or maybe your wallet, rather). We’re talking about analyzing your spending habits. Think about whether you tend to overspend on:

  • Clothes
  • Shoes
  • Food
  • Drinks

Figuring out your spending vices from the very beginning will help you learn how to use a 50/30/20 budget that effectively cuts spending where you need it most.

Take a look at your bank and credit card statements over the last few months and see if you can find any common trends. If you find that you’re overspending on going out for food and drinks, come up with a plan for how you can avoid this scenario.

There are plenty of ways to budget and save money without compromising your social life, such as:

  • Cook dinner at home before you go out
  • Have a potluck with friends
  • Find happy hour specials around town.

You can also try budgeting for groceries to make sure your eyes aren’t bigger than your stomach and you don’t overspend every time you step foot into the grocery store. The 50/30/20 budget rule is a good way to figure out exactly how much you have to spend on certain expenses.

Pro Tip: Using Mint’s easy budget categorization, you can identify where you can cut back on unnecessary expenses.

Identify Irregular Large Ticket Expenses in the “Wants” Category

Of course, there are expenses in life that we simply can’t avoid. Maybe you need to make a repair on your vehicle, or perhaps you’re putting a down payment on a house in the next six months. Oftentimes these bills are necessary expenses, so you’ll have to factor them into your budget.

When you’re coming up with your 50/30/20 budget, take a moment to look at your calendar so that you can plan for these expenses and adjust your spending in the time before and after you incur the expense.

Add Up All Income

Totaling your income is an important first step when learning how to budget your money using the 50/30/20 rule, but it’s not always as simple as it sounds. Depending on your job, you might have a relatively steady paycheck or one that fluctuates from month to month. If the latter is the case, collect your paychecks from the last six months and find the average income between them.

The last thing you want to happen is to end up in a budget deficit, which is when your spending is greater than your income. If you’re finding that you’re not able to meet that 20% for savings each month, that might mean it’s time to make some changes.

There are various ways you can increase your savings each month, such as:

  • Consider a minimalist lifestyle to cut back on some of your expenses
  • Increase your income with an additional stream of income
  • Negotiate your salary with your current employer

If you want an additional stream of income, but don’t want to leave the house to do so, you should look into how you can make money at home.

What Are the Benefits of the 50/30/20 Rule?

There are many benefits of using the 50/30/20 rule to budget:

  • It can help you get on top of your finances: The 50/30/20 rule is a simple way to get on top of your finances so you make sure you’re not spending beyond your means.
  • It can help you make a financial plan: Everyone’s financial plan looks different, but using the 50/30/20 rule is a great way to outline your finances so that you can figure out exactly what you need to do to achieve your goals. For example, if your goal is to invest more, the 50/30/20 rule will help you figure out exactly how much you need to put towards investments.
  • It’s easier to use than some other budgeting tools: There are a myriad of different budgeting tools and methods out there. Some people use financial calculators to calculate their budget, some people use a journal to write down all their expenses. But the 50/30/20 budget rule is often much easier to use than most other budgeting tools. It clearly outlines your expenses and savings so you can figure out if you’re staying on track with your finances.

Is the 50/30/20 Budget Right for You?

The 50/30/20 budget isn’t the only option. Other popular methods include:

  • Zero-sum: The principle of the zero-sum budget is that you must allocate each and every dollar you earn toward a specific expense, savings account, debt, or disposable income account. This style can help deter unnecessary spending because you’ll know exactly how much you have to spend on what items.
  • Envelope budgeting: Swiping your card left and right is easy—but the envelope method doesn’t let you succumb to this temptation. Rather than using your card to spend, you use a predetermined amount of cash as your spending pool, nothing more.

Choosing a budgeting style that works for you depends on a variety of factors; there’s no one-size-fits-all approach to budgeting and saving money. That said, the 50/30/20 tends to be a simple yet effective option for getting started on your budgeting journey.

Main Takeaways: How to Budget Using the 50/30/20 Rule

Here are the key tenets of the 50/30/20 rule of budgeting:

  • This budget rule is a simple method that can help you reach your financial goals.
  • This budgeting method stipulates that you spend no more than 50% of your after-tax income on needs.
  • The remaining after-tax income should be split up between 30% wants or “lifestyle” purchases, and 20% to savings or debt repayment.
  • This style of budgeting is a good way to save up for larger expenses, reduce your spending habits, and break the paycheck-to-paycheck cycle.
  • The 50/30/20 budget rule is a much more straightforward budgeting method than some of the other common strategies.

Try the 50/30/20 Budgeting Rule & Take Control of Your Finances

Mint offers budgeting software and a helpful budgeting calculator that makes it easy to live in accordance with the 50/30/20 rule (or any budget that suits your lifestyle) so that you can live life to its fullest. After spending just a little bit of time determining which of your expenses fall into which category, you can create your very first budget and keep track of it every day. And when your situation undoubtedly changes, Mint lets you adjust, so your budget can change with you.

Sign up for your free account today, build your 50/30/20 budget, and make this the year you build a strong foundation for your future.

Now that you know what the 50/30/20 budget rule is and how you can use Mint to make a budget, you can move onto the next chapter in the series, which covers zero-based budgeting. Continue reading our series to learn more about how budgeting can help you reach your goals and achieve financial stability.

Save more, spend smarter, and make your money go further

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How To Save Money on Rent: 10 Ways To Reduce Your Rent Payment

With rent climbing higher than ever, these tips can help you save money and stay within your budget.

If you’re apartment hunting right now or are on the verge of renewing your lease agreement, you’re probably noticing a trend. The rent is getting higher and higher. After a slump in rental prices caused by the pandemic, the price of rent is rebounding by hundreds, or even thousands, of dollars. Rent has already been climbing steadily over the past few decades, but this recent spike is pricing many people out of their homes or cities.

Thankfully, not all hope is lost for renters. While the high cost of rent is scary, there are ways you can reduce your monthly payments or find cheaper rates that fit your budget. Sometimes, you can negotiate with your landlord based on years of good behavior as a tenant or in exchange for services like maintenance repairs. Other times, it’s changing the location of where you live or how big your space is. Here are 10 tips for how to save money on rent.

Why is rent so expensive right now?

If it feels like rent is especially high right now and just keeps getting higher, that’s because it is. Due to a variety of factors, the cost of monthly rent has been climbing all over the U.S. But why has rent suddenly gotten so expensive?

The pandemic is partly to blame. When it began, many people moved away from big, pricy cities and metropolises seeking more room and space. With more units available and less demand, many landlords lowered their rents. But now, with people moving back to big cities, the demand is back and prices are jumping accordingly, with rents adjusting to and surpassing pre-pandemic levels.

Because of the extremely hot and competitive housing market, more people are staying renters instead of becoming homeowners. This means there are more and more people looking at and applying for a narrowing amount of rental units.

The lack of available units and rental units is another factor. There are simply not enough apartments and rental spaces available on the market to meet the large demand. Knowing that renters are desperate and have few options, a landlord can charge inflated prices.

These and other factors combine to make an expensive, difficult-to-navigate rental market. Potential renters also face challenges like real estate agents or investors with deep pockets who can pay upfront for a whole year or pay far more than the landlord is asking for the rental price.

Higher rents also mean a higher security deposit and other fees associated with renting like getting a background check on your credit report. If you don’t have enough savings, it’s hard to afford this process multiple times.

Combine all this and the high rental rates with the increasing cost of monthly expenses like utility bills and groceries, and lots of people are feeling the pinch right now. Luckily, there are steps you can take to save money and keep your rent down.

Tips for saving money on your monthly rent payments

Is your rent too darn high? Try these tips on how to save money on rent at your current or future apartment.

Move out of the big city.

Move out of the big city.

1. Move away from a city center

Sorry Petula Clark, but downtown is no longer the place to go to escape your worries and not be alone. Why? Because living downtown or near the city center is generally more expensive and you’ll likely need a roommate to afford it.

There’s more demand to live close to the heart of a city. It’s usually closer to offices and work, and it also lets you take advantage of all the perks of living in a big city. Dining, shopping and entertainment are all close by. But, you do pay a premium in rent for that access and proximity.

Even in the most expensive big cities, you can find more affordable rents in outlying neighborhoods and districts. When it comes to finding lower rental rates, choose your location wisely and live outside the city center. Yes, you’re not as close to all the city action. But you will save more money to actually enjoy those big-city attractions.

2. Find a smaller unit

Smaller apartments will have a smaller price tag. If you want to save money on rent, downsizing the size of your apartment is a great way to do so.

Larger apartments like two-bedroom apartments will always fetch higher rent. They’re bigger with more square footage, storage and other desirable amenities. So, if you’re finding yourself priced out of your two-bedroom apartment, look into smaller options like a one-bedroom apartment or a studio. With less square footage, these smaller apartments offer discounted rent.

You sometimes don’t have to look far for a more affordable new apartment, either. If you really like where you’re living but can no longer afford your current apartment, look at other units in your apartment complex. Apartment complexes will usually have numerous unit options size-wise. Yes, it does mean you’ll have a smaller room and smaller apartment overall. But it’s also a better deal.

A roommate will help you save money on rent.

A roommate will help you save money on rent.

3. Move in with a roommate

Having a roommate is one of the oldest tried and true ways to save money on rent. If your apartment or house is big enough to accommodate it, sharing the space and costs with a roommate — or several — helps a lot rent-wise. Everyone in the house splits the rent, so when it comes time for the landlord to collect rent, it will hurt your wallet a bit less.

Having roommates is also a great way to keep an apartment or house if rent has suddenly increased. If the rent has become too high but you can’t bear to part with your beloved home or moving out isn’t feasible for you, start looking for roommates. Living with a roommate, you can also split other housing costs like utility bills. It keeps costs down for everyone in the apartment or house.

Of course, this option won’t work for everyone. Some people value their personal space and alone time too much. Others don’t have big enough units to accommodate more people. But it can also be a lot of fun. You can meet new people and make new friends. Or, you can live with friends or move in with a significant other.

4. Pay more money upfront

If you have enough savings, you can offer the landlord more money upfront in exchange for reduced monthly rent. Think of it as similar to a down payment on a house. The more you pay upfront, the less you have to pay per month. For renting, it would reduce the amount you owe each month.

This is a more unconventional option, so you need to discuss it with your landlord in advance to see if it’s an option they’d consider.

A longer lease agreement will help save money on rent.

A longer lease agreement will help save money on rent.

5. Sign a two-year lease agreement

Scared of those pandemic rent price jumps that are going on? Rentals that were far cheaper in 2020 and 2021 now upping rent by hundreds or even thousands of dollars? One way to avoid those rent hikes is by signing up for an extended lease.

Instead of a standard one-year lease, sign an extended lease for two years or longer if you really like the place and want to stick around. There are numerous benefits to signing a long-term rental contract.

First, since they’ll have a new tenant locked in for several years, a landlord will sometimes reduce the monthly amount for rent. Since they know they won’t have a vacancy for a while, a price cut is sometimes acceptable.

Also, by signing a long-term lease, you can lock in the current rate for longer. After one year, even if rates are going up in other units, yours can’t change for another year. It’s good protection against a fluctuating market and high demand.

6. Search for rentals in the fall or winter

The time of year you’re looking at new rentals can also influence the price of rent because demand varies throughout the year.

Summer is usually the worst time to look for a new apartment. For one thing, the school year is over, so it’s an ideal time for families to move. People also have more time and availability on summer vacation. College students are also out for the summer and are moving cities. This time of flux for work and school means there are lots of people looking for new places to live.

Time your move and apartment search to happen during the fall and winter to find a better deal. Schools will be back in session, families are busy and there’s less hustle and bustle in the renting market. The cost of rentals may also be down due to reduced demand during this time period. Even if there’s not a big difference in cost, you can take advantage of the lack of demand to negotiate for less money.

Don

Don

7. Give back your parking space

If your unit comes with a parking space but you don’t have a car or use it, you can use it as a negotiation tactic.

Especially in the middle of a city, parking is in high demand. Landlords who can provide spaces to park cars have a definite advantage. Renters prefer to have a designated spot instead of hunting for parking on the street. It’s also safer for the car.

So, if you have a space you don’t intend to use, you can offer to give it back in exchange for reduced rent. In large apartment complexes where there aren’t enough spaces for all the tenants, your landlord might give you a discount for this convenience.

You’ll also save yourself from having to pay the additional fee that usually comes with having a parking space.

8. Look for units that aren’t updated

Newer and flashier comes at a premium.

One way a landlord can entice applicants is by updating units. Those fancy new apartments with updated appliances, granite countertops, hardwood floors and other splashy amenities will cost more because of all those upgrades. Yes, they look great. But the amount the landlord is charging is far more than the unit is actually worth.

To save money, look for units that haven’t been recently updated. This usually means they’ll have older appliances. They aren’t as attractive, and sometimes, they’re inefficient appliances because they’re not the newest models. But they’ll still get the job done. And, if they don’t work or end up breaking? That’s what landlords and maintenance are for.

Another way to save money on rent? When given the option between a furnished and an unfurnished unit, opt for the unfurnished place. They’re more affordable. Plus, it’s always more fun to bring your own furniture and make the place your own.

Fix everything yourself if you hav the skills.

Fix everything yourself if you hav the skills.

9. Offer to fix things yourself

Are you handy at fixing things? That may earn you a break on rent.

A landlord needs someone to fix things and offer maintenance services for their units. Usually, they’ll source this out. If you have verifiable experience as a handyman or can show your adeptness for fixing things, that someone could be you.

In exchange for your help around the property fixing minor issues and doing small repairs, your landlord may offer to discount your rent in exchange for these services.

10. Negotiate

Finally, one of the simplest ways to save money and pay less on your rent? Negotiate for a lower rate with your landlord.

As with any negotiation, it may not always work. Especially right now, landlords might not negotiate. But it never hurts to ask, and there are some circumstances where it can come out in your favor.

Say you’ve lived in the unit for a long time and have been a model tenant, but your lease is almost up and you’re facing an increase. Now is an ideal time to talk with your landlord. As a good tenant, you have some leverage. Explain that you want to stay but the new lease amount is too much. You can request a reduced amount based on your history as a model tenant. Your landlord may or may not go for it, but if they do, congratulations.

How much should I spend on paying rent?

The general rule of thumb is that you should only spend around 30 percent of your gross monthly income on rent. The idea behind this is that it creates a balanced budget. That goes toward your housing cost, leaving 70 percent for everything else like food, utilities, bills, savings and more.

This is a good idea in theory, but it definitely doesn’t apply to everyone and it can vary. You can always find an affordable place that’s under budget and less than 30 percent. Or, maybe you’re paying a bit more than 30 percent for rent, but you don’t have as many additional expenses.

The 30 percent is a good baseline, but it does vary. So, figure out what works best for you and your budget. You can check how much your rent is per month using our rent calculator.

Save more when the time comes to pay rent

Being able to afford rent is a serious challenge these days. These tips on how to save money on rent will pay off come the beginning of each month.

Source: rent.com

Conventional Mortgage Loan – What It Is & Different Types for Your Home

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The mortgage industry is rife with jargon and acronyms, from LTV to DTI ratios. One term you’ll hear sooner or later is “conventional mortgage loan.”

It sounds boring, but it couldn’t be more important. Unless you’re a veteran, live in a rural area, or have poor credit, there’s a good chance you’ll need to apply for a conventional mortgage loan when buying your next house.

Which means you should know how conventional mortgages differ from other loan types.


What Is a Conventional Mortgage Loan?

A conventional loan is any mortgage loan not issued or guaranteed by the Federal Housing Administration (FHA), Department of Veterans’ Affairs (VA), or U.S. Department of Agriculture (USDA). 


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Most conventional loans are backed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). These government-sponsored enterprises guarantee the loans against default, which lowers the cost for borrowers by lowering the risk for lenders.

As a general rule, stronger borrowers tend to use these private conventional loans rather than FHA loans. The exception concerns well-qualified borrowers who qualify for subsidized VA or USDA loans due to prior military service or rural location.


How a Conventional Mortgage Loan Works

In a typical conventional loan scenario, you call up your local bank or credit union to take out a mortgage. After asking you some basic questions, the loan officer proposes a few different loan programs that fit your credit history, income, loan amount, and other borrowing needs. 

These loan programs come from Fannie Mae or Freddie Mac. Each has specific underwriting requirements.

After choosing a loan option, you provide the lender with a filing cabinet’s worth of documents. Your file gets passed from the loan officer to a loan processor and then on to an underwriter who reviews the file. 

After many additional requests for information and documents, the underwriter signs off on the file and clears it to close. You then spend hours signing a mountain of paperwork at closing. When you’re finished, you own a new home and a massive hand cramp.  

But just because the quasi-governmental entities Fannie Mae and Freddie Mac back the loans doesn’t mean they issue them. Private lenders issue conventional loans, and usually sell them on the secondary market right after the loan closes. So even though you borrowed your loan from Friendly Neighborhood Bank, it immediately transfers to a giant corporation like Wells Fargo or Chase. You pay them for the next 15 to 30 years, not your neighborhood bank. 

Most banks aren’t in the business of holding loans long-term because they don’t have the money to do so. They just want to earn the points and fees they charge for originating loans — then sell them off, rinse, and repeat. 

That’s why lenders all follow the same loan programs from Fannie and Freddie: so they can sell predictable, guaranteed loans on the secondary market. 


Conventional Loan Requirements

Conventional loans come in many loan programs, and each has its own specific requirements.

Still, all loan programs measure those requirements with a handful of the same criteria. You should understand these concepts before shopping around for a mortgage loan. 

Credit Score

Each loan program comes with a minimum credit score. Generally speaking, you need a credit score of at least 620 to qualify for a conventional loan. But even if your score exceeds the loan program minimum, weaker credit scores mean more scrutiny from underwriters and greater odds that they decline your loan. 

Mortgage lenders use the middle of the scores from the three main credit bureaus. The higher your credit score, the more — and better — loan programs you qualify for. That means lower interest rates, fees, down payments, and loan requirements. 

So as you save up a down payment and prepare to take out a mortgage, work on improving your credit rating too.  

Down Payment

If you have excellent credit, you can qualify for a conventional loan with a down payment as low as 3% of the purchase price. If you have weaker credit, or you’re buying a second home or investment property, plan on putting down 20% or more when buying a home.

In lender lingo, bankers talk about loan-to-value ratios (LTV) when describing loans and down payments. That’s the percentage of the property’s value that the lender approves you to borrow.

Each loan program comes with its own maximum LTV. For example, Fannie Mae’s HomeReady program offers up to 97% LTV for qualified borrowers. The remaining 3% comes from your down payment. 

Debt-to-Income Ratio (DTI)

Your income also determines how much you can borrow. 

Lenders allow you to borrow up to a maximum debt-to-income ratio: the percentage of your income that goes toward your mortgage payment and other debts. Specifically, they calculate two different DTI ratios: a front-end ratio and a back-end ratio.

The front-end ratio only features your housing-related costs. These include the principal and interest payment for your mortgage, property taxes, homeowners insurance, and condo- or homeowners association fees if applicable. To calculate the ratio, you take the sum of those housing expenses and divide them over your gross income. Conventional loans typically allow a maximum front-end ratio of 28%. 

Your back-end ratio includes not just your housing costs, but also all your other debt obligations. That includes car payments, student loans, credit card minimum payments, and any other debts you owe each month. Conventional loans typically allow a back-end ratio up to 36%. 

For example, if you earn $5,000 per month before taxes, expect your lender to cap your monthly payment at $1,400, including all housing expenses. Your monthly payment plus all your other debt payments couldn’t exceed $1,800. 

The lender then works backward from that value to determine the maximum loan amount you can borrow, based on the interest rate you qualify for. 

Loan Limits

In 2022, “conforming” loans allow up to $647,200 for single-family homes in most of the U.S. However, Fannie Mae and Freddie Mac allow up to $970,800 in areas with a high cost of living. 

Properties with two to four units come with higher conforming loan limits:

Units Standard Limit Limit in High CoL Areas
1 $647,200 $970,800
2 $828,700 $1,243,050
3 $1,001,650 $1,502,475
4 $1,244,850 $1,867,275

You can still borrow conventional mortgages above those amounts, but they count as “jumbo” loans — more on the distinction between conforming and non-conforming loans shortly.

Private Mortgage Insurance (PMI)

If you borrow more than 80% LTV, you have to pay extra each month for private mortgage insurance (PMI).

Private mortgage insurance covers the lender, not you. It protects them against losses due to you defaulting on your loan. For example, if you default on your payments and the lender forecloses, leaving them with a loss of $50,000, they file a PMI claim and the insurance company pays them to cover most or all of that loss. 

The good news is that you can apply to remove PMI from your monthly payment when you pay down your loan balance below 80% of the value of your home. 


Types of Conventional Loans

While there are many conventional loan programs, there are several broad categories that conventional loans fall into.

Conforming Loan

Conforming loans fit into Fannie Mae or Freddie Mac loan programs, and also fall within their loan limits outlined above.

All conforming loans are conventional loans. But conventional loans also include jumbo loans, which exceed the conforming loan size limits. 

Non-Conforming Loan

Not all conventional loans “conform” to Fannie or Freddie loan programs. The most common type of non-conforming — but still conventional — loan is jumbo loans.

Jumbo loans typically come with stricter requirements, especially for credit scores. They sometimes also charge higher interest rates. But lenders still buy and sell them on the secondary market.

Some banks do issue other types of conventional loans that don’t conform to Fannie or Freddie programs. In most cases, they keep these loans on their own books as portfolio loans, rather than selling them. 

That makes these loans unique to each bank, rather than conforming to a nationwide loan program. For example, the bank might offer its own “renovation-perm” loan for fixer-uppers. This type of loan allows for a draw schedule during an initial renovation period, then switches over to a longer-term “permanent” mortgage.

Fixed-Rate Loan

The name speaks for itself: loans with fixed interest rates are called fixed-rate mortgages.

Rather than fluctuating over time, the interest rate remains constant for the entire life of the loan. That leaves your monthly payments consistent for the whole loan term, not including any changes in property taxes or insurance premiums.

Adjustable-Rate Mortgages (ARMs)

As an alternative to fixed-interest loans, you can instead take out an adjustable-rate mortgage. After a tempting introductory period with a fixed low interest rate, the interest rate adjusts periodically based on some benchmark rate, such as the Fed funds rate.

When your adjustable rate goes up, you become an easy target for lenders to approach you later with offers to refinance your mortgage. When you refinance, you pay a second round of closing fees. Plus, because of the way mortgage loans are structured, you’ll pay a disproportionate amount of your loan’s total interest during the first few years after refinancing.


Pros & Cons of Conventional Home Loans

Like everything else in life, conventional loans have advantages and disadvantages. They offer lots of choice and relatively low interest, among other upsides, but can be less flexible in some important ways.

Pros of Conventional Home Loans

As you explore your options for taking out a mortgage loan, consider the following benefits to conventional loans.

  • Low Interest. Borrowers with strong credit can usually find the best deal among conventional loans.
  • Removable PMI. You can apply to remove PMI from your monthly mortgage payments as soon as you pay down your principal balance below 80% of your home’s value. In fact, it disappears automatically when you reach 78% of your original home valuation.
  • No Loan Limits. Higher-income borrowers can borrow money to buy expensive homes that exceed the limits on government-backed mortgages.
  • Second Homes & Investment Properties Allowed. You can borrow a conventional loan to buy a second home or an investment property. Those types of properties aren’t eligible for the FHA, VA, or USDA loan programs.
  • No Program-Specific Fees. Some government-backed loan programs charge fees, such as FHA’s up-front mortgage insurance premium fee.
  • More Loan Choices. Government-backed loan programs tend to be more restrictive. Conventional loans allow plenty of options among loan programs, at least for qualified borrowers with high credit scores.

Cons of Conventional Home Loans

Make sure you also understand the downsides of conventional loans however, before committing to one for the next few decades.

  • Less Flexibility on Credit. Conventional mortgages represent private markets at work, with no direct government subsidies. That makes them a great choice for people who qualify for loans on their own merits but infeasible for borrowers with bad credit. 
  • Less Flexibility on DTI. Likewise, conventional loans come with lower DTI limits than government loan programs. 
  • Less Flexibility on Bankruptcies & Foreclosures. Conventional lenders prohibit bankruptcies and foreclosures within a certain number of years. Government loan programs may allow them sooner. 

Conventional Mortgage vs. Government Loans

Government agency loans include FHA loans, VA loans, and USDA loans. All of these loans are taxpayer-subsidized and serve specific groups of people. 

If you fall into one of those groups, you should consider government-backed loans instead of conventional mortgages.

Conventional Loan vs. VA Loan

One of the perks of serving in the armed forces is that you qualify for a subsidized VA loan. If you qualify for a VA loan, it usually makes sense to take it. 

In particular, VA loans offer a famous 0% down payment option. They also come with no PMI, no prepayment penalty, and relatively lenient underwriting. Read more about the pros and cons of VA loans if you qualify for one. 

Conventional Loan vs. FHA Loan

The Federal Housing Administration created FHA loans to help lower-income, lower-credit Americans achieve homeownership. 

Most notably, FHA loans come with a generous 96.5% LTV for borrowers with credit scores as low as 580. That’s a 3.5% down payment. Even borrowers with credit scores between 500 to 579 qualify for just 10% down. 

However, even with taxpayer subsidies, FHA loans come with some downsides. The underwriting is stringent, and you can’t remove the mortgage insurance premium from your monthly payments, even after paying your loan balance below 80% of your home value.

Consider the pros and cons of FHA loans carefully before proceeding, but know that if you don’t qualify for conventional loans, you might not have any other borrowing options. 

Conventional Loan vs. USDA Loan

As you might have guessed, USDA loans are designed for rural communities. 

Like VA loans, USDA loans have a famous 0% down payment option. They also allow plenty of wiggle room for imperfect credit scores, and even borrowers with scores under 580 sometimes qualify. 

But they also come with geographical restrictions. You can only take out USDA loans in specific areas, generally far from big cities. Read up on USDA loans for more details.


Conventional Mortgage Loan FAQs

Mortgage loans are complex, and carry the weight of hundreds of thousands of dollars in getting your decision right. The most common questions about conventional loans include the following topics.

What Are the Interest Rates for Conventional Loan?

Interest rates change day to day based on both benchmark interest rates like the LIBOR and Fed funds rate. They can also change based on market conditions. 

Market fluctuations aside, your own qualifications also impact your quoted interest rate. If your credit score is 800, you pay far less in interest than an otherwise similar borrower with a credit score of 650. Your job stability and assets also impact your quoted rate. 

Finally, you can often secure a lower interest rate by negotiating. Shop around, find the best offers, and play lenders against one another to lock in the best rate.

What Documents Do You Need for a Conventional Loan?

At a minimum, you’ll need the following documents for a conventional loan:

  • Identification. This includes government-issued photo ID and possibly your Social Security card.
  • Proof of Income. For W2 employees, this typically means two months’ pay stubs and two years’ tax returns. Self-employed borrowers must submit detailed documentation from their business to prove their income. 
  • Proof of Assets. This includes your bank statements, brokerage account statements, retirement account statements, real estate ownership documents, and other documentation supporting your net worth.
  • Proof of Debt Balances. You may also need to provide statements from other creditors, such as credit cards or student loans.

This is just the start. Expect your underwriter to ask you for additional documentation before you close. 

What Credit Score Do You Need for a Conventional Loan?

At a bare minimum, you should have a credit score over 620. But expect more scrutiny if your score falls under 700 or if you have a previous bankruptcy or foreclosure on your record.

Improve your credit score as much as possible before applying for a mortgage loan.

How Much Is a Conventional Loan Down Payment?

Your down payment depends on the loan program. In turn, your options for loan programs depend on your credit history, income, and other factors such as the desired loan balance.

Expect to put down a minimum of 3%. More likely, you’ll need to put down 10 to 20%, and perhaps more still.

What Types of Property Can You Buy With a Conventional Loan?

You can use conventional loans to finance properties with up to four units. That includes not just primary residences but also second homes and investment properties. 

Do You Need an Appraisal for a Conventional Loan?

Yes, all conventional loans require an appraisal. The lender will order the appraisal report from an appraiser they know and trust, and the appraisal usually requires payment up front from you. 


Final Word

The higher your credit score, the more options you’ll have when you shop around for mortgages. 

If you qualify for a VA loan or USDA loan, they may offer a lower interest rate or fees. But when the choice comes down to FHA loans or conventional loans, you’ll likely find a better deal among the latter — if you qualify for them. 

Finally, price out both interest rates and closing costs when shopping around for the best mortgage. Don’t be afraid to negotiate on both. 

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.

Source: moneycrashers.com

Buying a Home in a Seller’s Market With a Low Down Payment

It has been difficult lately to buy a home with a small down payment, considering that the average home price rose by 17% in 2021, and cash offers and bidding wars remain a thing. But buying a house with a low down payment is possible.

Lenders are willing to approve low-down-payment mortgages if you qualify and are comfortable with paying mortgage insurance.

Here’s some help navigating the current real estate market if you have a small down payment.

What Is Considered a Low Down Payment?

According to the National Association of Realtors®, 45% of consumers think they need a down payment of 16% to 20% or more to buy a house. In actuality, the average down payment on a house in 2021 was 17%. If you look at just first-time homebuyers in that survey, the average down payment was closer to 7%.

Given the wide ranges above, what’s actually considered a low down payment? Popular mortgage programs out there may require as little as 3% down, and a couple of more specific home loan programs allow 0% down.

Just keep in mind that anything under a 20% down payment will likely entail some form of mortgage insurance, an ongoing fee charged by most lenders.

Challenges of Buying in a Seller’s Market When You Have a Small Down Payment

There’s truth to the saying “cash is king,” and that continues to be evident in today’s seller’s market, where real estate investors who pay all cash frequently outbid prospective first-time homebuyers.

Be ready for these potential challenges if you intend to buy a home with a small down payment.

Longer Closing Time

Closing on a home with a mortgage-contingent offer to buy takes longer than closing with a cash offer. There’s often more paperwork, and underwriters may take longer to ensure that your financials are in order before green-lighting your mortgage.

Lenders May Disagree With Mortgage Minimums

Just because a mortgage loan program allows for a 3% minimum down payment doesn’t mean the lender will accept it. Lenders have wide latitude to dictate their own terms, and it’s fairly common for them to set their own minimum down payment requirement somewhere above what the stated minimum for the program is.

Home Sellers May Be Nervous About Your Ability to Close

While it’s true that all funds from your down payment and mortgage transfer to the seller at closing, many sellers still buy into the old “bird in hand” adage when it comes to accepting offers. A higher down payment signals a buyer’s financial capacity and is therefore more attractive in the eyes of the homeowner.

If sellers accept a bid with a low down payment, they may run an increased risk of the buyer being rejected at the last minute by their mortgage lender.

In a deal involving a mortgage backed by the Federal Housing Administration (FHA), if the home is appraised for less than the agreed-upon price, the sellers must match the appraised price or the deal will fall through.

And FHA guidelines require home appraisers to look for certain defects. If any are found, the sellers may have to repair them before the sale.

Tips for Buying With a Small Down Payment

If you’re trying to score a home with a small down payment, there are some ways you can approach it to increase your odds of buying the home of your dreams.

One way is to select a government-backed mortgage program — FHA, or the U.S. Department of Agriculture or Veterans Affairs — that allows for a low down payment. The government guarantee makes them more palatable for mortgage lenders and easier for a homebuyer to afford.

Some specialized mortgage programs allow qualified buyers to put as little as 0% down; others, from 3% to 5% down. Some of the most popular low-down-payment mortgage programs are:

•   VA loans (0% down)

•   USDA loans (0% down)

•   FHA loans (3.5% down)

•   Fannie Mae HomeReady (3% down)

•   Conventional 97 loan (3% down)

•   Conventional mortgage (5% down)

Another option is to apply for down payment assistance. Many governments and nonprofits offer down payment assistance programs for first-time homebuyers — those who have not owned a principal residence in the past three years — in the form of loans or grants. Some lenders can even help you qualify for these programs to help offset the upfront costs of homebuying.

Finally, you can also ask a family member, or sometimes a domestic partner, close friend, or employer, to help with the down payment by contributing gift money. The money can’t come with any strings attached, and a gift letter will be key. This is a popular option for parents and in-laws who want to help their children buy a first home.

Pros and Cons of Using a Low Down Payment

There are both benefits and disadvantages to submitting a small down payment on a home. Here are a couple of points to think about.

Pros of Using a Low Down Payment

•   Gets you in a home faster than waiting to save for a bigger down payment.

•   Start building equity earlier and avoid spending money on rent.

•   Preserve cash for other investments, opportunities, and emergencies.

•   Take advantage of current low mortgage rates, theoretically saving you money over the long run.

Cons of Using a Low Down Payment

•   You’ll have to pay private mortgage insurance, or a mortgage insurance premium, which could add 0.5% to 1.5% of the loan amount to your annual housing costs.

•   Your monthly mortgage payment will likely be larger, as the amount you borrow will increase the less you put down.

•   Your lender may penalize you with a higher mortgage rate to offset the higher risk of a lower down payment.

•   You run a greater risk of your home loan being underwater, should home values drop.

Tips for Managing a Seller’s Market

So what’s a prospective homebuyer to do in a seller’s market when the cards are stacked against them?

One way to get a leg up on the competition is to get the ball rolling on financing early and make sure you have everything in place by the time you even submit an offer on a home.

Making sure you’re pre-qualified, when lenders have an idea of your income and assets before you start home shopping, and then pre-approved, when you receive a letter from a lender stating that you qualify for a certain loan amount and rate, can ensure that you’ll be ready to roll the second you find the right home.

Once you’ve submitted an offer on a house, make sure you’re Johnny-on-the-spot when it comes to all documents and information requested by your chosen lender.

Another thing you can do is to find an experienced real estate agent who’s been through the homebuying process countless times.

No matter the temperature of the market, tips for how to shop for a mortgage can come in handy.

The Takeaway

Buying a home with a small down payment, even in a seller’s market, is possible. With preparation and the right mortgage lender, you may be able to land a starter home or your dream home with a low down payment.

SoFi allows a down payment of as little as 3% for qualified first-time homebuyers and 5% for other borrowers for its line of low-fixed-rate mortgages.

Before you apply for a home loan, start with a no-obligation mortgage rate quote from SoFi.

It takes just minutes to get your rate.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Source: sofi.com

Here’s Exactly What to Do if You Can’t Pay Rent

In this era of rapidly increasing housing costs, many renters know the familiar dread when the first of the month is coming and they know they can’t cover the rent.

But now’s not the time to bury your head in the sand.

By exercising your negotiation muscle, you may be able to strike a deal with your landlord that prevents the worst-case scenario: getting kicked out of your home. And in those crunch times, it’s always a good idea to look at your budgeting and spending to see where you could find a little extra cash to put toward rent.

Negotiating a Deal With Your Landlord If You Can’t Pay Rent

When you think you can’t pay rent for the upcoming month, it’s best to talk to your landlord sooner rather than later.

Here’s what you should do.

First, Know Your Rights

Matt Koz, finance director for the Tenant Resource Center in Madison, Wisc., recommends that renters do their due diligence to research the eviction laws in their area.

The federal eviction moratorium enacted in response to the pandemic ended in August 2021, but some states, cities and counties passed their own laws protecting tenants and granting them new rights.

Being educated about the tenant laws in your state doesn’t just give peace of mind about whether your landlord can evict you during a crisis. It can also help you decide how to best proceed when reaching out to your landlord.

For example, Koz said there could be laws where you live that make it disadvantageous to pay partial rent, if you were thinking of suggesting that to your landlord.

“In some cases, it may be better not to offer terms and wait to see what recourse is available to you,” he said.

Approach Your Landlord with Empathy

You may just think of your landlord as a faceless entity that takes the biggest single chunk of your money every month. But a little kindness can go a long way.

“Lead with empathy,” advises Michael Thomas, an Accredited Financial Counselor and faculty member at the University of Georgia. “It’s very easy to become self-absorbed when we’re experiencing a financial shock.”

He says taking the time to ask how your landlord is doing and working to establish a relationship can make them more willing to work with you. Understanding where each person is coming from can lead to a resolution that’s best for both parties.

Provide Realistic Solutions

Offering up a solution to your situation can show your willingness to work with your landlord.

You might propose to make a partial payment with a promise to pay the remainder of the rent by a certain date. If you don’t know when you’d be able to make the remaining payment, Koz said it’s reasonable to make an agreement based upon a specific occurrence.

For example, you might ask if you can pay the remainder once your kids’ school starts and you can pick up more hours at work.

Instead of suggesting a partial payment, you could ask to skip paying for one month and spread that payment over the remainder of your lease if you think you’ll be able to pay the following month.

Another option: Ask your landlord to apply your security deposit to the upcoming rent payment, agreeing to replace it at a later date. Or if you paid your last month’s rent upfront when you first signed your lease, you could ask to apply that money to next month’s rent.

Pro Tip

When trying to come up with a rent solution for the upcoming month, make sure you’re not creating a worse financial situation for yourself later on.

Something else you might consider is bartering. For example, you could agree to do landscape work for your landlord’s properties in exchange for a break on rent.

When trying to strike a deal, Thomas suggests coming up with at least three plausible solutions that work for your budget.

“Go with your best-case scenario first,” he said.

If your landlord won’t agree to that, ask for their input on mitigating the situation before presenting your other options.

Get Agreements in Writing

If you and your landlord are able to agree on an alternative plan for paying rent, make sure to get that deal in writing.

“If [your landlord] were to come back and say we didn’t agree to that, [you can say]: Actually we did and here’s proof,” said Pamela Capalad, a New York-based Certified Financial Planner and founder of Brunch and Budget.

Putting things in writing also helps eliminate misinterpretations of your agreement, she said.

However, when signing a lease addendum or other paperwork, don’t rush into a contract with terms you don’t understand.

“If you’re not sure what you’re signing, you can always try to contact a tenants rights organization or an attorney,” Koz said. “Whatever you sign is something that you’re held to. If you don’t meet the terms of that agreement, you’re back where you started.”

Don’t Go (Further) into Debt

You may experience shame over not paying rent or fear over potentially losing your home, but try not to let that lead you to making drastic decisions.

“The thing I would recommend, if you can avoid it, is to not take out loans to pay rent,” Capalad said.

It can be comforting to put things in perspective and realize you’re not the only one who can’t pay your rent right now, she said.

4 Measures to Take If You Can’t Pay Rent

If your landlord won’t budge on requiring you to pay your rent in full, here are a few ideas for coming up with the money.

1. Seek Housing Assistance

Look into local housing assistance or eviction prevention programs for emergency funding to help keep you in your home.

The United Way’s 211 network is a great way to connect to resources in your community. Other charities, like Modest Needs, may also be able to help. Your landlord may even know of housing assistance options in your area.

2. Bring In a Roommate

If you can find a good roommate, you can split housing expenses and lower your financial obligation. Just make sure you properly vet the potential roommate and your landlord approves of the new tenant.

Subleasing your place could be another route to take, provided your landlord allows it and you have somewhere else you can crash in the meantime.

3. Sell Something

Make some extra dough by selling things you don’t regularly use. Put that money toward the rent.

Check out these 14 websites for selling things online.

Wondering what to sell? We’re glad you asked. Vintage china, gold jewelry, ’90s collectibles or your old vinyl record collection can all bring in some serious cash.

4. Get Another Gig

Get money for rent by securing a second source of income.

Consider a side gig, like a food delivery driver or a pet sitter, where you’re paid based on how much work you take on. These jobs often pay faster than traditional jobs that run on a biweekly schedule.

Nicole Dow is a senior writer at The Penny Hoarder.

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Source: thepennyhoarder.com

Chapter 7: Using the 50-30-20 Rule to Budget

So far in this series, we’ve answered important questions about budgeting, such as “What is a budget?” and “Why is budgeting beneficial?” This series has been focusing on how using a budget can help you keep your spending in check and ensure your savings goals are on track.

One way to do that is using Mint’s free 50/30/20 calculator to budget.

The 50/30/20 rule (also referred to as the 50/20/30 rule) is one method of budgeting that can help you keep your spending in alignment with your savings goals. Budgets should be about more than just paying your bills on time—the right budget can help you determine how much you should be spending, and on what.

The 50/30/20 rule can serve as a great tool to help you diversify your financial profile, reach dynamic savings goals, and foster overall financial health.

In this post, we’re taking you through the steps of budgeting using the 50/30/20 approach so that you can learn how to set up a budget that’s sustainable, effective, and simple. Use the links below to navigate or read all the way through to absorb all of our tips on how to budget using the 50/30/20 method:

In the previous chapters, we discussed what to include in a budget and the various ways you can create your own budget, like with a budget template. If you haven’t read through them already, we highly recommend going through them to get a comprehensive overview of budgeting.

What is the 50/30/20 Budgeting Rule?

The 50/30/20 budgeting rule–also referred to as the 50/20/30 budgeting rule–divides after-tax income into three different buckets:

  • Essentials (50%)
  • Wants (30%)
  • Savings (20%)

Essentials: 50% of your income

To begin abiding by this rule, set aside no more than half of your income for the absolute necessities in your life. This might seem like a high percentage (and, at 50%, it is), but once you consider everything that falls into this category it begins to make a bit more sense.

This will include your living expenses each month, which are essential expenses that you would almost certainly have to pay, regardless of where you lived, where you worked, or what your future plans happen to include. In general, these expenses are nearly the same for everyone and include:

  • Housing
  • Food
  • Transportation costs
  • Utility bills

The percentage lets you adjust, while still maintaining a sound, balanced budget. And remember, it’s more about the total sum than individual costs. For instance, some people live in high-rent areas, yet can walk to work, while others enjoy much lower housing costs, but transportation is far more expensive.

How much your essential expenses cost will differ for each person depending on where they live and what their lifestyle is. If you’re thinking of relocating to a different part of the country, it’s a good idea to calculate your cost of living beforehand so you can know if you can realistically afford to live in that area based on your current total income.

Wants: 30% of your income

The second category, and the one that can make the most difference in your budget, is unnecessary expenses that enhance your lifestyle. Some financial experts consider this category completely discretionary, but in modern society, many of these so-called luxuries have taken on more of a mandatory status. It all depends on what you want out of life and what you’re willing to sacrifice.

These personal lifestyle expenses include items such as:

  • Your cell phone plan
  • Cable bill
  • Trips to the coffee shop
  • Savings for travel
  • Gym memberships
  • Weekend trips
  • Dining out

If you travel extensively or work on-the-go, your cell phone plan is probably more of a necessity than a luxury. However, you have some wiggle room since you can decide upon the tier of the service you’re paying for.

Only you can decide which of your expenses can be designated as “personal,” and which ones are truly obligatory. Similar to how no more than 50 percent of your income should go toward essential expenses, 30 percent is the maximum amount you should spend on personal choices. The fewer costs you have in this category, the more progress you’ll make paying down debt and securing your future.

Savings: 20% of your income

The next step is to dedicate 20% of your take-home pay toward savings. This is essentially how much you should set aside from your paycheck each month for savings. This can include different types of savings like:

  • Savings plans
  • Retirement accounts
  • Debt payments
  • Rainy-day funds

These are all things you should add to, but which wouldn’t endanger your life or leave you homeless if you didn’t. That’s a bit of an oversimplification, but hopefully you get the gist. This category of expenses should only be paid after your essentials are already taken care of and before you even think about anything in the last category of personal spending.

Think of this as your “get ahead” category where you can challenge yourself to save. Whereas 50%(or less) of your income is the goal for essentials, 20%—or more—should be your goal as far as obligations are concerned. You’ll pay off debt quicker and make more significant strides toward a frustration-free future by devoting as much of your income as you can to this category.

The term “retirement” might not carry a sense of urgency when you’re only 24 years old, but it certainly will become more pressing in decades to come. Just keep in mind the advantage of starting early is you will earn compounding interest the longer you let this fund grow.

You don’t want to cash out your 401k to be able to pay off debt. The more you put towards savings now, the quicker you can pay off your debt and achieve financial stability.

Use our compound interest calculator to see how your money can grow over time.

Establishing good habits will last a lifetime. You don’t need a higher paying job to follow the tenets of the 50/30/20 rule; anyone can do it. Since this is a percentage-based system, the same proportions apply whether you’re earning an entry-level salary and living in a studio apartment, or if you’re years into your career and about to buy your first home.

A note of caution, though: Try not to take this rule too literally. The proportions are sound, but your life is unlike anyone else’s. What this plan does is provide a framework for you to work within. Once you review your income and expenses and determine what’s essential and what’s not, only then you can create a budget that helps you make the most of your money. Years from now, you can still fall back on the same guidelines to help your budget evolve as your life does.

Give our 50/30/20 budgeting calculator a try to see how this budgeting method works:

50/30/20 Budget Calculator
Here’s how much you have for:
Essentials$0.00
Wants$0.00
Savings$0.00
Reset

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Ask Yourself: Why is a 50/30/20 Budget Necessary?

According to Consumer.gov, there are plenty of different reasons why people start a budget:

  • To save up for a large expense such as a house, car, or vacation
  • Put a security deposit on an apartment
  • To reduce spending habits
  • To improve their credit score
  • To eliminate debt
  • To break the paycheck to paycheck cycle

Identifying the reason why you’re budgeting with the 50/30/20 method can help you stay motivated and create a better plan to reach your goal. It’s kind of like the “eye on the prize” mentality. If you’re tempted to splurge, you can use your overarching goal to bring you back to your saving senses. So ask yourself: why am I starting to budget? What do I want to achieve?

Additionally, if you’re saving up for something specific, try to determine an exact number so that you can regularly evaluate whether or not your budget is on track throughout the week, month, or year.

How to Budget with the 50/30/20 Rule

To make the most of this budgeting method, consider following the steps below:

Deep Dive Into Your Current Spending Habits

Before implementing a 50/30/20 budget, take a long, hard look in the mirror (or maybe your wallet, rather). We’re talking about analyzing your spending habits. Think about whether you tend to overspend on:

  • Clothes
  • Shoes
  • Food
  • Drinks

Figuring out your spending vices from the very beginning will help you learn how to use a 50/30/20 budget that effectively cuts spending where you need it most.

Take a look at your bank and credit card statements over the last few months and see if you can find any common trends. If you find that you’re overspending on going out for food and drinks, come up with a plan for how you can avoid this scenario.

There are plenty of ways to budget and save money without compromising your social life, such as:

  • Cook dinner at home before you go out
  • Have a potluck with friends
  • Find happy hour specials around town.

You can also try budgeting for groceries to make sure your eyes aren’t bigger than your stomach and you don’t overspend every time you step foot into the grocery store. The 50/30/20 budget rule is a good way to figure out exactly how much you have to spend on certain expenses.

Pro Tip: Using Mint’s easy budget categorization, you can identify where you can cut back on unnecessary expenses.

Identify Irregular Large Ticket Expenses in the “Wants” Category

Of course, there are expenses in life that we simply can’t avoid. Maybe you need to make a repair on your vehicle, or perhaps you’re putting a down payment on a house in the next six months. Oftentimes these bills are necessary expenses, so you’ll have to factor them into your budget.

When you’re coming up with your 50/30/20 budget, take a moment to look at your calendar so that you can plan for these expenses and adjust your spending in the time before and after you incur the expense.

Add Up All Income

Totaling your income is an important first step when learning how to budget your money using the 50/30/20 rule, but it’s not always as simple as it sounds. Depending on your job, you might have a relatively steady paycheck or one that fluctuates from month to month. If the latter is the case, collect your paychecks from the last six months and find the average income between them.

The last thing you want to happen is to end up in a budget deficit, which is when your spending is greater than your income. If you’re finding that you’re not able to meet that 20% for savings each month, that might mean it’s time to make some changes.

There are various ways you can increase your savings each month, such as:

  • Consider a minimalist lifestyle to cut back on some of your expenses
  • Increase your income with an additional stream of income
  • Negotiate your salary with your current employer

If you want an additional stream of income, but don’t want to leave the house to do so, you should look into how you can make money at home.

What Are the Benefits of the 50/30/20 Rule?

There are many benefits of using the 50/30/20 rule to budget:

  • It can help you get on top of your finances: The 50/30/20 rule is a simple way to get on top of your finances so you make sure you’re not spending beyond your means.
  • It can help you make a financial plan: Everyone’s financial plan looks different, but using the 50/30/20 rule is a great way to outline your finances so that you can figure out exactly what you need to do to achieve your goals. For example, if your goal is to invest more, the 50/30/20 rule will help you figure out exactly how much you need to put towards investments.
  • It’s easier to use than some other budgeting tools: There are a myriad of different budgeting tools and methods out there. Some people use financial calculators to calculate their budget, some people use a journal to write down all their expenses. But the 50/30/20 budget rule is often much easier to use than most other budgeting tools. It clearly outlines your expenses and savings so you can figure out if you’re staying on track with your finances.

Is the 50/30/20 Budget Right for You?

The 50/30/20 budget isn’t the only option. Other popular methods include:

  • Zero-sum: The principle of the zero-sum budget is that you must allocate each and every dollar you earn toward a specific expense, savings account, debt, or disposable income account. This style can help deter unnecessary spending because you’ll know exactly how much you have to spend on what items.
  • Envelope budgeting: Swiping your card left and right is easy—but the envelope method doesn’t let you succumb to this temptation. Rather than using your card to spend, you use a predetermined amount of cash as your spending pool, nothing more.

Choosing a budgeting style that works for you depends on a variety of factors; there’s no one-size-fits-all approach to budgeting and saving money. That said, the 50/30/20 tends to be a simple yet effective option for getting started on your budgeting journey.

Main Takeaways: How to Budget Using the 50/30/20 Rule

Here are the key tenets of the 50/30/20 rule of budgeting:

  • This budget rule is a simple method that can help you reach your financial goals.
  • This budgeting method stipulates that you spend no more than 50% of your after-tax income on needs.
  • The remaining after-tax income should be split up between 30% wants or “lifestyle” purchases, and 20% to savings or debt repayment.
  • This style of budgeting is a good way to save up for larger expenses, reduce your spending habits, and break the paycheck-to-paycheck cycle.
  • The 50/30/20 budget rule is a much more straightforward budgeting method than some of the other common strategies.

Try the 50/30/20 Budgeting Rule & Take Control of Your Finances

Mint offers budgeting software and a helpful budgeting calculator that makes it easy to live in accordance with the 50/30/20 rule (or any budget that suits your lifestyle) so that you can live life to its fullest. After spending just a little bit of time determining which of your expenses fall into which category, you can create your very first budget and keep track of it every day. And when your situation undoubtedly changes, Mint lets you adjust, so your budget can change with you.

Sign up for your free account today, build your 50/30/20 budget, and make this the year you build a strong foundation for your future.

Now that you know what the 50/30/20 budget rule is and how you can use Mint to make a budget, you can move onto the next chapter in the series, which covers zero-based budgeting. Continue reading our series to learn more about how budgeting can help you reach your goals and achieve financial stability.

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Source: mint.intuit.com

Moving to San Jose: What All Renters Need to Know

San Jose is the largest city in northern California and is home to 1.013 million people.

Located in Santa Clara County and about 50 miles southeast of San Francisco, this city once was the capital of California. While Sacramento is now the state capital, San Jose is famous for being the capital of Silicon Valley.

Silicon Valley is known as the global innovation and tech headquarters, with tech giants like Facebook, Apple and Google calling the San Jose area home. It’s also full of start-ups hoping to become the next tech unicorn.

In addition to the tech scene, people love San Jose for its amazing climate, incredible hiking trails, ample job opportunities and a wide variety of neighborhoods. If you’re moving to San Jose, here’s everything you need to know to make your transition as easy as possible.

We’ll talk about the all good, the bad and the expensive things associated with living in the bay area.

San Jose

San Jose

What should I know before moving to San Jose?

Before moving to any city, it’s smart to research things like crime rates, rental costs, housing costs and median income. These things will help you understand if you can afford the average rent and make a life for yourself in San Jose.

We’ll dig into all the details about life in San Jose below, but here are some quick San Jose facts for you to consider upfront:

These are just some of the things to consider before moving to other major cities. Whether you’re moving to San Francisco, Santa Cruz or any other city in the surrounding bay area, it’s important to do your due diligence before signing a lease.

San Jose

San Jose

Is San Jose a good place to live?

Most people rave about life in San Jose, so if you’re thinking about moving here, chances are you’ll love it. San Jose is a large city but it has a good blend of buildings and rolling hills so you get the downtown vibe plus the beauty of nature. Compared to other cities, it doesn’t feel as crowded as Downtown New York, for example.

San Jose residents are typically young professionals, with 37 percent of the population in the 20-44 age range. It’s a city that values education, with 25 percent of people holding an associate’s or bachelor’s degree.

People flock to San Jose for high-paying jobs and the booming tech market. People will either love or loathe the competitive nature and hustle culture, so keep that in mind when considering a move to San Jose proper.

In general, San Jose is a great place to live. You’ve got mild weather, a diverse culture, close proximity to the San Francisco bay area and a variety of San Jose neighborhoods to pick a home or apartment to settle down.

If you’re still skeptical about moving to San Jose, keep reading and we’ll let the facts about San Jose speak for themselves.

Popular neighborhoods in San Jose

San Jose is a big city with lots of different areas to choose where to live. We’ve highlighted some of San Jose’s best neighborhoods and added a few fun facts about each of them. This should help you decide which San Jose neighborhood is best for you.

Blossom Valley

Blossom Valley

Blossom Valley

Source: Rent.com/One Pearl Place

Blossom Valley is a neighborhood located in the south part of the city, northeast of Almaden Valley and northwest of Santa Teresa. This neighborhood houses approximately 78,000 people, so it’s quite large. Residents of Blossom Valley pride themselves on their connectedness and community involvement. Residents host several community events and you’ll likely become friends with your neighbors. The Westfield Oakridge Mall is in this neighborhood, so you’ll have close access to shopping, specialty stores and restaurants. Apartments in Blossom Valley average $2,859 for a one-bedroom place.

Willow Glen

Willow Glen

Willow Glen

Source: Rent.com/Cedar Glen Apartments

The Willow Glen neighborhood is “San Jose’s Local Treasure.” Residents love the tree-lined streets and historic charm of Lincoln Avenue. This neighborhood is full of shops, boutiques, coffee shops, bakeries and restaurants. Residents can enjoy the year-round Farmer’s Market and other festivals that are often put on. You can find an apartment in Willow Glen and can expect to pay an average of $2,495 for a one-bedroom apartment.

North San Jose

North San Jose

North San Jose

North San Jose is one of the more expensive areas with a one-bedroom apartment renting for $2,967 a month, on average. This area has three districts — Alviso, Berryessa and Rincon – Golden Temple. North San Jose, or NSJ, is a great area and is famous for the San Jose Flea Market. You can find some hidden treasures at the antique shop and then enjoy some delicious food from some of the ethnic restaurants located here. You’ll also be near several parks, including the Guadalupe River, where you can trail walk and enjoy nature.

Morgan Hill

Morgan Hill

Morgan Hill

Morgan Hill is another area located in Santa Clara County at the southern tip of Silicon Valley. Frequently ranked as one of the safest cities in California, this neighborhood is sure to please residents who choose to live here. If you’re looking for a place to live that’s vibrant and full of outdoor activity, this is a great neighborhood to consider. You’ve got biking, golfing, swimming and boating almost year-round. Rent for a one-bedroom apartment in Morgan Hill averages $3,044, making it a more expensive place to live.

South San Jose

South San Jose

South San Jose

The neighborhood of South San Jose is home to many professionals and tech companies. If you’re looking for a place that’s close to work and affordable, consider this area of San Jose. You’ll have a shorter commute and can save money on transportation costs. After work, enjoy a variety of parks and walking trails in the neighborhood. You can also check out the Santa Teresa district, located in South San Jose. Renters pay approximately $2,255 for a one-bedroom in this part of the city.

Central San Jose

Central San Jose

Central San Jose

This neighborhood is the heart of Silicon Valley and the financial district. It houses a variety of people from young professionals to retirees. You can expect to pay about $2,688 for an apartment in Central San Jose. Residents in this San Jose neighborhood can enjoy the Municipal Rose Garden, where you can see over 3,500 roses and 189 varieties at any given time. The Rose Garden is a great tourist attraction, but it’s also great for residents who can meander through the flowers, for free, and literally stop to smell the roses.

Downtown San Jose

Downtown San Jose

What it’s like living in Downtown San Jose

If you want to live in the heart of the city, consider living in San Jose Downtown area. Here, residents will see historic buildings and apartments that date back to the 1870s. You’ll have plenty to do, as well. From delicious restaurants and bars to artsy theaters and museums, downtown San Jose seems to have it all.

Because it’s the city center, it’s usually more crowded and residents experience more traffic. Be prepared for a longer commute to work if you live here.

Residents like living in Downtown San Jose because they have easy access to almost all types of entertainment. And, you can easily get to parks or walking trails, too. Renters pay about $2,454 living here, which is actually less expensive than some other neighborhoods in San Jose.

West San Jose

West San Jose

Life in West San Jose

West San Jose is another part of the city that is highly desirable. It’s a highly populated residential area, but it also has lots of shopping. You’ve got the Westfield Valley Fair mall full of your typical chain stores, plus, Santana Row. Santana Row is a stretch of boutique shops and artisan restaurants. It’s pricier to shop on Santana Row, but you’ll come away with lots of unique goodies.

What salary do you need to live in San Jose?

As you’ve probably heard, San Jose is an expensive city. From the high cost of housing to the high costs of utilities and groceries, you need to earn a certain amount of money to afford San Jose’s cost of living.

Let’s do a little math to help you understand what salary you need to live in San Jose. Conventional wisdom states that only 30 percent of your income should go to rent. The average rent for a one-bedroom apartment in San Jose is $2,704 a month or $32,448 per year, which is 30 percent of $108,106. That means you’d need to have a salary of at least $108,106 to afford the average cost of a one-bedroom apartment. The median income in San Jose is right around $117,000, for additional context.

When considering San Jose’s costs, you’ll want to budget for the basics — rent, utilities, groceries, insurance and entertainment. While everyone’s budget is different, you do need to have an above-average salary to afford a comfortable life in Silicon Valley.

Gorgeous oak in San Jose

Gorgeous oak in San Jose

The pros of living in San Jose

A pros and cons list is one of the best ways to see all the facts about a city on paper. We’ve covered the top pros and illustrated all the benefits of life in San Jose.

Great weather

Most California cities have great weather but the San Jose climate is next level. It’s often called a Mediterranean climate as you’ll experience both wet and dry seasons. Overall, the temperature is mild and ranges between 40 and 80 degrees but it rarely gets too hot or too cold.

March is the rainiest and most humid month. June through August are the driest months. July is usually the warmest month with the longest days, so if you’re looking to enjoy some warm weather to get outside, your best bet is July. December sees the least amount of sunshine and the average temperature is around 43 degrees.

Overall, San Jose residents enjoy a mild climate year-round. If you’re looking for a place where the temperatures are not extreme, San Jose is the city for you.

Hot job market

San Jose city boasts of high-paying jobs above the national average and a low unemployment rate. With hundreds of start-ups and tech giants headquartered in Silicon Valley, you’re in good shape if you’re looking for a job in San Jose.

Santa Clara County saw a 5 percent increase in growth in the second half of 2021, despite Covid-19 surges. Workers enjoy being employed by companies like Airbnb, Slack, LinkedIn, Square and Dropbox, according to a report by Business Insider.

Young professionals are particularly eager to live and work in San Jose as it’s a great place with a hot job market.

Beautiful scenery

San Jose is a unique place because it has a perfect blend of downtown life and beautiful scenery. Full of rolling hills, parks, walking trails and other outdoor activities, residents can live in a suburban neighborhood, visit the city center and get their fix of city life and then enjoy nature and the surrounding scenery of San Jose. You can also get to the beach in under an hour and enjoy the ocean views in Santa Cruz.

Home prices are high in San Jose

Home prices are high in San Jose

The cons of living in San Jose

For every pro, there’s a con or downside to living in San Jose. The three cons we’ve highlighted are expensive housing prices, limited social scene and heavy traffic. Let us tell you why these are pain points for residents of San Jose.

Expensive housing prices

Housing is incredibly expensive, both for renters and homeowners alike. In fact, it’s 34 percent more expensive compared to the national average. Here’s a snapshot of rental prices for a few different apartment types:

  • The average cost of a studio apartment is $2,485
  • The cost of a one-bedroom apartment is $2,704
  • The average cost of a two-bedroom apartment is $3,444
  • The average cost of a three-bedroom apartment is $4,099

Only one percent of rentals cost less than $1,000 per month. Most places, 86 percent to be exact, will run you more than $2,000 per month.

Limited social scene

San Jose is not known for its nightlife. While you’ll find several restaurants, coffee shops and bars in the Downtown area, you’ll be disappointed in the social scene if you compare to places like Los Angeles or New York City.

It’s a big city in terms of size and population, but it doesn’t have a wild social scene for party-goers. However, you’ll be able to save money on social outings as it has limited offerings.

Heavy traffic

As with any big city these days, traffic is always a problem, especially during rush hour. The average commute time is anywhere from 15 to 30 minutes. While traffic is a pain point, it’s a fairly walkable city with a walk score of 62 and a bike score of 69. That means that you can get around fairly easily without a car. However, most locals still have a car and suggest keeping it when living in San Jose to make getting around easier.

San Jose does have public transportation. The VTA, or Valley Transit Authority, is the main public transportation system with busses, shuttles and light rails available for residents. With frequent routes and low fares, you can rely on public transportation to get around San Jose, especially when traffic is too heavy to drive.

Things to do in and near San Jose

When living in San Jose, you’ll have a plethora of things to do. Here are some of our favorite activities for both residents and tourists alike.

Stanford University

Stanford University

Visit Stanford University

Standford is one of the most famous universities and it’s well worth a day trip to visit the campus. Check out the different buildings, enjoy a snack on the quad and people watch as the students go to-and-from their research.

See a San Jose sharks game

San Jose residents love their hockey. When living or visiting San Jose, you must catch a San Jose Shark’s ice hockey game. You’ll enjoy the fierce competition and also get to check out the massive SAP center. Everyone loves an afternoon of sports, especially when cheering on the local team.

Go to the Rosicrucian Egyptian Museum

Are you fascinated by ancient Egypt and the secrets of the pyramids? You can explore the Rosicrucian Egyptian Museum in San Jose and see over 4,000 ancient Egyptian artifacts that are on display here.

Visit the Tech Interactive

San Jose is the tech hub of the U.S. so it’s only fitting that there’s a family-friendly tech and science center to get kids interested in STEM. Catch an IMAX movie and get hands-on tech experiences at this creative center focused on tech.

Hike in San Jose

Hike in San Jose

Take a hike or visit a park

Hiking is a must-do activity in San Jose. Some of the crowd favorite hikes are Los Gatos Creek Trail and Bridge, Calera County Park and Sierra Vista Open Space Preserve. Whether you’re a beginner or advanced hiker, San Jose offers something for you. The point is to get outside and explore!

If hiking isn’t your thing, you can spend the day exploring parks like Brigadoon Park or Hellyer County Park. These are full of green, grassy areas, walking trails and they even have a skate park.

Taste wine in Napa Valley

Less than two hours from San Jose, you can enjoy a day (or weekend) away in Napa Valley. Wine country is full of sprawling vineyards and amazing scenery. Visit one of the wineries located here and enjoy some of the finest wine in the U.S.

Santa Cruz beaches

If you want to enjoy a day at the beach, you can take a quick 45-minute drive to the ocean. Play in the water, soak in the sun and enjoy the feel of sand on your toes. This is the closest beach to San Jose.

Day trip to downtown Los Gatos

Another great day trip is visiting Downtown Los Gatos. You can eat, shop and explore the old town. Sometimes, it’s fun to tour your own state and visit other nearby cities for the day.

You may also consider a drive to visit the San Francisco bay area as it’s about an hour away. The bay area is always fun and you can bike across the Golden Gate Bridge or ride a trolley up and down the steep streets of the city.

San Jose street food

San Jose street food

Places to eat in San Jose

San Jose’s food scene is not lacking in taste. San Jose restaurants are diverse and delicious. You can have anything from Japanese food to French to American food. Some local favorites include District, Mosaic Restaurant, The Farmers Union and Elyse. Check them all out when you move to San Jose.

Schools in and near San Jose

San Jose is a great place for education. You’ve got great school systems from elementary aged-kids all the way up to advanced education. Here are some of the most notable San Jose schools and what they’re famous for.

  • San Jose State University — San Jose State is known for its business, management and marketing programs.
  • Santa Clara University — This is one of the most excellent schools for business programs.
  • Stanford University — Stanford is a famous research school known for its top programs in computer and information sciences and engineering.

San Jose

San Jose

San Jose compared to San Francisco

As you’re thinking about moving to the bay area, you’re probably wondering about San Jose versus San Francisco. Both are in the northern part of California and both are great cities to call home.

San Francisco is more expensive compared to San Jose with rent in San Francisco averaging $3,430 for a one-bedroom apartment. While rent is expensive in both cities, it’s more expensive in San Francisco.

Both cities boast of a great job market with lots of jobs for tech enthusiasts. Like San Jose, San Francisco has a diverse culture, great scenery and beautiful weather. San Francisco has a more diverse nightlife and cultural scene, so if you’re looking for a wide variety of things to do after work, San Francisco is a better option. San Jose is a better choice if you’re looking for a large city with ample opportunity but don’t mind a quieter social scene.

The good news is that both cities are within close proximity to each other. From the San Francisco international airport, you are in San Jose in under 40 minutes. You can have the best of both worlds by moving to San Jose and day-tripping to San Francisco.

How to move to San Jose

So, you’ve decided you’re moving to San Jose. You’ve researched which San Jose neighborhoods you like, you’ve checked your budget and can make ends meet and you’re ready to find an apartment. Now, it’s time to plan your move to San Jose itself. Check out the Rent.com moving center as it’s a great go-to resource for all things moving.

We think you’ll truly enjoy life in the Santa Clara Valley as you settle into your new home in San Jose. After all, it’s one of the top-rated places to live in the US and a global hub for tech and innovation. Whatever part of the city limits you settle down in, you’re sure to love it. Enjoy moving to San Jose!

The rent information included in this article is based on a median calculation of multifamily property inventory from Rent.com. The information does not constitute a pricing guarantee or financial advice related to the rental market.
Additional data came from the U.S. Census Bureau, coli.org and Redfin.com.

Source: rent.com