Saving for Your First Place

by K.C. Hernandez ; Updated December 22, 2017
Saving for Your First Place

Understanding the Costs of Rending Your First Place

Becoming a renter for the first time requires careful planning. You'll need to cover some upfront moving expenses as well as the new bills that come with living on your own. Good budgeting, a steady income and savings will help you leave the nest and weather the financial troubles that may arise. Saving for your first place starts months before you move and may be more difficult if you live in a high-rent city, where housing takes a larger chunk of your income and leaves less money to stash away.

Renting Ratios

A common rule of the thumb for determining the max rent payment you should make is 30 percent of your gross monthly income. Financial experts hold the 30-percent benchmark as the ideal amount to spend on housing. It allows you to use only a fraction of your income, leaving money for other necessary expenses and savings – if you live in an affordable city.

Staying within the 30-percent range becomes much trickier, and even impossible, if you have to live in the country's priciest cities. You can expect to pay closer to 50 percent of your income for the same type of rental in a high-cost area vs. a low- or moderate-cost city. Cities like San Francisco, New York, Boston and other major metropolises across the country cost more due to housing shortages, which drive rents up year after year.

Rent, transportation and food costs should use up no more than 60 percent of your income. In high-cost areas, however, you may find yourself paying more than this for the top three expenses you will face when you move out on your own. That means you'll have less to spend on other items, such as insurance, retirement, savings, entertainment and paying off debt.

Try to pay as little as possible for your first place by choosing an inexpensive location or moving in with roommates. If you can, avoid renting in an expensive city altogether, at least for your first place. Find a cheaper place to rent, perhaps in a suburb of a major city, if you can't avoid living in a high-cost area. The savings you reap while living inexpensively can later be put toward a home purchase or moving to a more expensive city in the future, if that's ultimately your goal. Also, consider moving in with one or more roommates to offset rent and overall living expenses.

Income Requirements

Most landlords verify your income to ensure you can reasonably afford the rental. They do this via recent pay stubs and W2s or tax returns. They might also check your bank statements to assess your overall money management and liquidity. Landlords sometimes rely on basic formulas to determine whether you earn enough money to apply for a rental or to determine the maximum rent you can afford.

For example, some landlords want your annual income to be 40 times the monthly rent. To qualify, your pre-tax, or gross, annual income is divided by 40. The result is your max monthly rent. Landlords may use different formulas such as 30 times the rent, depending on what is customary in the rental market where you are searching.

Building A Budget

Build a realistic budget that you can stick to before and after you move into your first place. You may need to revise it after you move into your first place, as your living expenses change. An effective budget requires sufficient income to cover your bills, emergencies and retirement. However, it also requires you to curb spending. You can make a lot of money and still have trouble making ends meet if you overspend. Likewise, you can cover rent, bills and have money left over on a modest income, if you budget correctly.

Set your budget with a specific goal in mind, such as saving enough for your deposit and several months worth of rent and necessary expenses. Experts believe that the amount of emergency savings you need depends on various factors, including job stability and comfort level. While some renters may be comfortable with having as little as three months of emergency funds, others may need two years worth to feel they are covered if times get tough.

A pre-move out budget should help you stash away money for your rental deposit, which is usually one or two months worth of rent. It should also allow you to save for several months of rent and bills. A good savings plan involves paying yourself first. That is, put away a portion of your earnings as soon as you receive your paycheck or direct deposit. Paying yourself before you pay your bills or spend on other things helps to ensure you save regularly to meet your goal.

Many Moving Costs

A rental deposit, or security deposit, will likely be the lion's share of your move-in costs. This fee helps protect the landlord if you fail to pay rent or damage the property. A security deposit differs from a "last month's rent" fee, which you might also be required to pay upon moving in. This is the final month's rent – a prepayment – of the last rent payment of your tenancy.

State law regulates how much a landlord can charge you up front, and in some states, the security and the last month's rent deposit cannot exceed one month's worth of rent each. If you're a good tenant and leave the rental in great condition when moving out, you can expect a full refund of your security deposit at the end of your lease.

A landlord may also charge credit-check and application fees. These costs are typically nominal, but are required upfront upon applying for a rental. Set aside about $100 to $125 for a credit report and application fee for each adult that will live in the rental. If you're bringing a pet along, expect to pay a security deposit for potential damage it may cause to the unit, and perhaps even an additional amount of rent each month.

Moving costs can run high depending on how far you're moving, how much stuff you have to move and how you transport it. You can estimate your moving costs using one of many free online moving-cost calculators. For example, a single person moving into a relatively small place, such as a studio or one-bedroom apartment, can expect to spend under $300 for two movers over a three- to five-hour move.

Moving out of state, or hauling belongings for a large household, however, will cost much more. You can cut moving costs dramatically by packing and unpacking your own belongings and using your own vehicle or engaging the help of friends and family to haul your stuff.

An additional fee that may apply in your area includes an agent or finder's fee to the person who helps you to locate, apply for and get into your first rental. This charge can range between 8 percent and 15 percent of a year's lease. In some cases, the landlord and not the renter, pays this fee. It depends on the rental market and what is customary in your area.

Counting the Other Costs

Plan to pay for more than just the rent each month. Your monthly budget should include the utilities and services you will use when you're on your own, such as:

  • Electricity and gas
  • Water
  • Internet and phone service
  • Trash and recycling pick-up

The amount of your utility bills will depend on how much time you will spend at home, the energy efficiency of your appliances, temperature control, and how diligent you are about conserving water and energy. Some costs, such as trash pick-up, internet, cable and phone, are fixed; however, you will experience fluctuations in utility bills, which depend on usage. A landlord may cover all, some or none of the utilities. You can expect the rent to run higher for a place where the landlord covers utilities or services.

You can estimate your utility and service costs at about 20 percent of your monthly rent amount. That figure may be slightly lower if you live with roommates. Other fees to consider when saving for your first place include parking and laundry, if these aren't included with your rental unit.

About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.