Money Management

Overspending on rent is a common financial issue. Learn about the consequences of spending half your income on rent and how you can fix it. 

A popular rule of thumb is to spend no more than 30% of your income on rent. So if you gross $4,000 per month, your rent should ideally be $1,200 or less.

Unfortunately, that’s not always realistic. If you’re in a city with a high cost of living, and especially if you’re a young adult earning an entry-level salary, your rent could cost much more than the 30% rule recommends. You might find yourself choosing between spending 40% to 50% of your income on rent, or living with your parents to save money.

When I lived in Los Angeles in my early 20s, I was in this situation. My rent wasn’t even that expensive, by Los Angeles standards. But I didn’t earn much, so there was a time when I spent about half my income on rent. If you’re considering this, here’s what it’s like and alternative options.

It’s nearly impossible to get ahead financially

Money is extremely tight when you spend 50% of your income on rent. Let’s say your gross income is $4,000 per month. After taxes, that will likely be in the neighborhood of $3,400. If you’re spending $2,000 on rent, that leaves you with $1,400 for food, car insurance, gas, health insurance, and all your other bills.

You’ll need to carefully manage your spending just to pay the rest of your living expenses. Going out is something you may be able to do once or twice a month, if at all, and picking up the tab for friends is pretty much out of the question.

You also probably won’t have anything left over to save or invest. That leaves you stuck in neutral with your personal finances. You can’t start building a retirement fund. You won’t be able to save for emergencies, either, so you won’t be ready for any surprise expenses.

Now, it is possible to get by like this, at least temporarily. But it’s not sustainable. At some point, you’ll have an unexpected bill come up. Maybe your car breaks down, or you have a medical emergency. If you don’t have any savings, you’ll need to go into debt to cover it. When your income is already stretched to the limit, you likely won’t be able to afford another debt payment. People often end up borrowing more and getting deeper into credit card debt this way.

The long-term consequences of overspending on rent

Overspending on rent makes everyday life stressful. You always feel like you’re living on the edge of a disaster. That’s not even the worst part, because the biggest issue is the long-term impact this has on your finances.

Going back to that example above, let’s say you make $4,000 per month, take home $3,400 after taxes, and spend $2,000 on rent. With $1,400 for living expenses, you break even every month. You aren’t able to save any money. In a best-case scenario where you aren’t hit with any surprise expenses, you’ll still have nothing saved in a year, five years down the road, and so on.

On the other hand, if you spend $1,200 on rent, you’ll be in a much better position. That leaves you with an additional $800 per month. You could, for example, use that as follows:

$300 per month in fun money to spend how you like$250 per month in savings for an emergency fund$250 per month in a retirement account

After one year, you’ll have a $3,000 emergency fund and $3,000 in retirement savings. If you invest your retirement savings, that money will also grow. Over time, this can make a massive difference in how much you’re able to save.

For example, if you save $250 per month toward your retirement for 40 years, you’ll have saved $120,000 total. If you invest it and get an 8% annual return, which is in line with the stock market’s average performance, you’ll have $777,170. Investing your money is a powerful way to build wealth, but you can’t take advantage if you have nothing to invest.

How to spend less of your income on rent

I know that spending less on rent is easier said than done. Housing is expensive in most major cities, and wages haven’t kept up. In 92% of the largest U.S. metro areas, rent growth has exceeded income growth, according to The Journal Record.

Still, spending 50% of your income on rent doesn’t work long term. Not everyone is able to get this to 30%, but it’s important to at least take steps to reduce that number. Here are a few options to consider:

Work on raising your income: This is what worked for me, and what I’d recommend. If you’re an employee, see if you can negotiate a raise or find a job with a larger salary. If you’re a freelancer or have your own business, look for ways to increase your profits, such as landing higher-paying clients.Look for more affordable housing in your area or nearby: You could downsize to save on rent — there’s often a difference of hundreds of dollars per month between studio and one-bedroom apartments. Another option is moving to a less expensive neighborhood.Consider getting a place with a roommate: If you don’t mind living with someone else, it’s usually much cheaper to split a two-bedroom apartment than to pay for a one-bedroom apartment yourself. Plus, you can share the cost of utilities.

All of these options work, so it depends on what’s realistic for you. If you can raise your income, that’s almost always a worthwhile move to improve your finances. But it can take time, and not everyone has the same wage growth opportunities. More affordable housing, or getting a roommate, could be faster solutions.

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Want to be an international traveler? It’s more possible than you might think. See how many Americans travel abroad, and how you can get cheap flights. 

A recent survey from the Pew Research Center uncovered some interesting findings about Americans’ travel to other countries. A surprisingly large percentage of Americans have international travel experience, and these global adventures have affected their perspectives in powerful ways.

Are you a longtime world traveler and frequent flyer? Or are you still getting ready to apply for a passport for the first time? No matter where you fall on the spectrum of world travel experience, you might enjoy these insights about how Americans travel — and how international travel changes people’s lives.

Let’s look at a few surprising insights from the Pew Research Center on how Americans travel abroad.

A large majority of Americans have traveled to other countries

I’m an American who has spent time living and traveling in other countries. And sometimes I’ve gotten the impression that people from other countries have a stereotype about Americans. They tend to believe that lots of Americans haven’t visited other countries, and that Americans aren’t curious about the wider world beyond U.S. borders.

But this stereotype isn’t true! The Pew Research survey found that 76% of Americans have international travel experience. Only 23% of Americans have not traveled to other countries — and most of these non-travelers said they would like to visit other countries if they had the opportunity.

The Pew Research study broke down the survey respondents into three groups, based on who has traveled the most:

26% of Americans are “globetrotters” who have traveled to five or more other countries.50% of Americans are “casual travelers” who have visited one to four other countries.23% of Americans are “non-travelers” who have not (yet) left the U.S.

I have had the great privilege of being able to travel to 11 other countries (so far), which puts me in the “globetrotters” group. Americans have some catching up to do if we want to be as well-traveled as people in Australia, Canada, South Korea, and Europe. Here’s how a few of those other places stack up in the rankings on the international “globetrotters” list (five or more countries visited):

The survey results didn’t go into detail about which countries were most frequently visited by Americans; maybe a lot of Americans are getting their first international travel experience from countries close to home. Sometimes the best way to break in your new U.S. passport is to take affordable winter vacations in Mexico or the Caribbean. But wherever people are going, it’s heartening to see such a large percentage of Americans joining the proud ranks of world travelers.

How international travel changes your life

Traveling to other countries has been one of the most profound and formative experiences of my life. It’s the best money I’ve ever spent. (I wish I was booking another trip right now; where’s my credit card?) International travel is a 24/7 immersive learning opportunity. You learn so much every day in another country, about food and music and language, and all the little nuances of people-watching, getting around, and navigating a new place. Every restaurant meal or grocery store visit is an adventure.

When you’re in another country, it feels a little easier to be outgoing, open to possibilities, and excited to greet the day; I’ve quickly made new friends during my international travels in ways that don’t often happen when I’m at home. I believe — I hope — that international travel has made me a more broad-minded, well-rounded, and compassionate human being.

There’s some evidence that international travel changes your perspective in powerful ways. The Pew Research survey found that “globetrotters” (people who’ve been to five or more countries) are more likely to be knowledgeable about international affairs, and more likely to have an international perspective. The study found that, among globetrotters:

57% want America to be active in world affairs66% want America to take other countries’ interests into account, even if it requires compromise42% feel close to people all over the world

We are living through a time of global crises like pandemics, war, and climate change. It’s more important than ever for people to find common ground and a shared sense of humanity. International travel can help create those connections, one person at a time.

How to get affordable international travel

Want to join the ranks of the “globetrotters?” Here are a few tips for how to get cheap international travel that fits your budget:

Search for “anywhere” plane tickets: Use Google Flights, Skyscanner, and Kayak to search for flights to anywhere — with no specific destination. You’ll immediately see surprising deals from your home city to anywhere in the world!Be an adventurous traveler: Find a cheap ticket and go to a country where you don’t know anyone. One of our writers at The Ascent found a cheap ticket to Santiago, Chile for only $220!Use travel deal services: You can get cheap flights by signing up for a few emails from services like Dollar Flight Club or TravelZoo.Get savvy about travel rewards credit cards: If you sign up for a travel credit card or an airline credit card, you can often get significant bonus frequent flyer miles. Depending on when and where you fly, your airline credit card can help you get a free (or heavily discounted) international flight!

Bottom line: A surprisingly large majority of Americans have traveled to other countries, and more are likely to join the ranks of “globetrotters” in the years ahead. Booking affordable international travel is more doable than you might think. You too can enjoy the life-changing learning experience of visiting other countries.

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It’s important to make a plan if you need to sell a car before it’s paid off. Learn what happens when you have a car loan you can’t afford. 

Not too long ago, my friend told me about a big money problem that she was having. She had stopped making payments on her vehicle and, in the end, the car ended up getting repossessed.

My friend isn’t alone. Around 1.2 million vehicles were repossessed in 2022 and the automotive organization, Cox Automotive, predicted that 1.5 million would end up getting repossessed in 2023. And while my friend made some questionable decisions that led to the repossession, she was also led astray by some bad advice from car salesmen who just wanted to make a deal.

Here’s how she found herself in this unpleasant situation.

Car dealers gave her a loan she couldn’t really afford

Unfortunately, my friend got in way over her head because many car dealers are willing to offer financing to just about anyone, even in situations where it makes no sense to do so. Since the car is collateral and guarantees the loan, the lender doesn’t really face much risk of loss since it can repossess and sell the car if the buyer stops paying.

My friend had a pretty good credit score, although she had a limited amount of irregular income. She also already had a car with a loan on it. Her plan was to buy a new car first, sell the old one, and then use the proceeds from the car sale to pay off the old loan.

She was pretty confident she could sell the car she had, and the dealer she bought the vehicle from didn’t question that she already had a car loan on her credit report. It gave her a car loan despite that the two loans together would eat up a significant amount of her income. Plus, when combined with her other obligations, she’d be left spending about 65% of her earnings on the cars, housing costs, and other debts.

Unfortunately, it’s not practical to devote that much income to debt payments. The reality was, she could not afford two car loans even though the dealer was willing to arrange the financing for her.

Confusion about what would happen to her car loan was a big issue

Now, my friend absolutely should have been realistic about her personal finances and whether she could afford both loans. But, the problem is, she was overly optimistic about what her car would sell for and she wasn’t clear on what would happen to her payments if she couldn’t sell it for all she owed.

It turned out that she couldn’t sell her car for enough to pay off the debt she had. And her contingency plan was that she’d sell the car, pay off most of the loan, and then just make lower monthly payments for the rest of the debt over time. Unfortunately, it doesn’t work that way, though. In order for her to sell the car, she would have had to pay off the loan in full.

She tried to get a personal loan to cover the difference between what she could sell the car for and what she owed on it, but because she already owed so much, no lender was willing to work with her. She couldn’t sell her car, she couldn’t afford the payments on it, and she was stuck — so her car got repossessed.

To avoid this mistake, remember two big things:

You can’t sell a car until you’ve paid the loan off in full. So if you’re underwater and owe more than your vehicle is worth, you need to deal with that before even considering getting a new vehicle. Ideally, you should keep your current car until it’s paid off and then still keep driving it so you can avoid having a car payment for a while.You shouldn’t assume that you can afford a loan just because a dealer is willing to give it to you. You need to think about your own financial situation, look at the payments, and be sure you can afford it based on your current monthly budget and financial obligations before you take on the debt.

Having a car repossessed can be costly and damaging to your credit, so before you get a car loan or take on any kind of secured debt, keep these tips in mind.

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To get the best deal, you’ll have to look beyond the rate offered by your current lender. Read on to learn how mistakes can eat into your savings. 

Ideally, refinancing works like this: You leverage your credit gains to score a lower rate and therefore save big on your mortgage payments. But some common mistakes can eat into those savings, and potentially even make refinancing an expensive financial misstep. It’s important to make sure the process is really giving you the benefits you need.

Here are three mistakes to avoid when looking to refinance your mortgage.

Mistake 1: Not shopping around

Your mortgage lender may send you an offer to refinance your loan, and you may think, “Great, I’m done.” If you like and trust your existing lender, and it’s offering a great deal, that could be the right move. Even so, it’s still vital to shop around to ensure you’re getting the best loan available. For example, your mortgage lender may not offer the same perks as other lenders or be as competitive with interest rates. The thing is: You won’t know until you look elsewhere.

As we’ll cover below, the rate and fees can have a major impact on how much you save and even whether it’s worth the effort to refinance. The best first step here is checking out the top mortgage refinancing lenders and getting quotes whenever possible to understand the full range of your options.

Mistake 2: Forgetting to factor in all refinancing costs

You’d think houses were expensive enough, based on the sticker prices, but mortgages — included refinanced ones — also require you to pay closing costs. These generally run from 2% to 5% of your loan amount, but can vary by lender. This can include things like a loan application fee, underwriting fee, origination fee, and mortgage insurance.

So, for example, if you were to refinance a $300,000 mortgage, you could expect the closing costs to be about anywhere from $6,000 up to $15,000. Assuming you’re saving $300 per month with your new loan terms, it would still take 20 to 50 months for you to recoup those costs. That may not be a problem if the house is your forever home, but those looking to sell soon may need to consider this expense more seriously.

The Good Faith Estimate (GFE) should list off the various fees associated with the loan, giving you a more accurate picture of the total costs. This document is required for most types of mortgages, and should be provided by the lender within a few business days of receiving your application.

Mistake 3: Only focusing on the rate

The APR associated with your mortgage is a major factor you should consider when refinancing. It can cut thousands of dollars off of your mortgage. But it’s not the only thing you need to scrutinize. For instance, the new loan term can also be make or break, depending on your circumstances. Let’s say your existing mortgage has 15 years left on it, with a $200,000 balance and a 4% interest rate. If you were to refinance down to a 3.5% rate, but selected a 20-year term, you’d end up paying just over $100,000 more for that new loan over the course of that new term.

That’s why using a mortgage refinancing calculator is a vital part of the process. You should also look at factors like what fees are included in the closing costs, and the lender’s customer service reputation to ensure it’s the right fit.

Refinancing your mortgage can help you save money, both on the monthly payment and in the long term. But if you don’t take a holistic approach — considering the full scope of the fees and terms available from multiple lenders — you could end up missing out on the benefits.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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