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How Much Should I Pay In Rent

How Much Should I Pay In Rent? Am I Spending Too Much?

If you’re a renter or planning to rent, you’ll probably know how high rents are. The average rent in Canada was $2,005 per month in January 2023. Of course, where you live is a big factor in determining how much you pay in rent. Still, you may be wondering, “How much should I pay in rent?”

That’s a great question; the answer depends on your circumstances. First, your rent has to be affordable so you can pay for the other things you need, like groceries and transportation. But, on the other hand, you also don’t want to spend too much even if you can afford it. So, what’s the best way to set a rental budget, and how can you protect yourself from rent becoming an increasingly large part of your expenditures?

How Much is Too Much for Rent?

The place to begin before you start looking for rental units is to set a budget. You’ll need to determine what you need in a rental unit and where you want to live. Finally, you want to make sure your rent is as reasonable as possible.

Prepare a budget to find out how much you should pay in rent

If you don’t have a budget already, you need to create one. Renting is a major expense; typically, you must sign a year’s lease. Since rent is a long-term commitment, a budget will help you know how much you can comfortably afford.

When making a budget, include your after-tax income and all your expenses. Expenses include things like:

  • Groceries
  • Transportation
  • Debt repayments
  • Cell phones
  • Childcare
  • Your budget should also include discretionary expenses such as:
  • Gifts
  • Savings
  • Dining out

Your budget can help you with your financial goals as well. Your goals could be saving for a home, getting out of debt, or beginning an investment plan. Once you know how much money you need for your essential expenses, discretionary expenses, and financial goals, you’ll be able to see how much you have to put toward rent.

How much should I pay in rent?

Conventional wisdom states you should pay a maximum of 30% of your pre-tax (gross) income on rent. If your annual gross salary is $48,000, your annual rent should be, at most, $14,400 or $1,200 per month.

However, spending a maximum of 30% of your gross income on rent is just a general rule of thumb. It doesn’t consider your unique circumstances, which is why having a realistic budget is vital in helping you know how much you should pay in rent.

After you complete your budget, you’ll know if you’re spending too much on rent. If your rent payment is so high that you have little room for other important expenses, you’re likely paying too much for rent.

Decide on needs and wants

Due to the rapid increase in our cost of living, you might have a lot less to spend on wants, so you need to determine exactly what you need for a rental. When looking for a place to live, you must choose one that suits your needs. Once you know your non-negotiables, you can look for your ideal home.

Sometimes, paying more for something you want can make sense because it allows you to save money in other areas. If you find a place that’s near enough to your workplace that you can walk or take public transit, you could save hundreds of dollars a month by not needing a car. Or, if your building has a gym, you can save money on a gym membership. In these situations, paying more for rent could result in significant savings elsewhere.

Know your rights

Once you’ve answered the question, “How much can I afford to pay for rent?” you can take steps to ensure your rental payment is in keeping with your budget. Of course, managing your rental costs can be more challenging if you have a lease in place, but you can still do some things to keep your rent affordable.

The first is to know your rights. Each province has rules that govern the landlord and tenant relationship. If you need to break your lease to move somewhere less expensive, look at the laws that apply to your province. Knowing the landlord’s rights and obligations can protect you too. Your province will have regulations that specify when a landlord can raise the rent and when they can choose not to renew your lease or evict you.

Some provinces, including Ontario, have rent control. Rent control allows your landlord to raise your rent 12 months after your tenancy begins or 12 months after the last rent increase. The current guideline provides for a 2.5% rent increase for 2023.

Rent control doesn’t apply to all housing or all units. In Ontario, for example, there are exemptions to rent controls. One thing you should be aware of as a renter is the age of the unit you want to rent. Any newly rented basement apartment, new building, or new addition to a building occupied by a residential tenant for the first time after November 15, 2018, is not subject to rent control. So, if you’re renting one of these units, your landlord can increase your rent by considerably more than 2.5% per year.

A significant rent increase can devastate your finances, so rent control can help. If you live in a building subject to rent control and pay $1,800 monthly, a 2.5% increase will raise your rent by $45. If your rental is exempt from rent control and the landlord raises your rent by 10%, that may significantly affect your budget.

Research before you move

Moving to a cheaper place can seem like a solution, but it has drawbacks. Rents increased by 9.7% from March 2022-March 2023. Once you factor in the rent increase of the less expensive place and the costs to move, you might not be much farther ahead than if you were to stay where you are.

Instead of moving, you could review your budget to see if there are other areas where you can reduce your spending. Another option is to increase your income to make your rent more affordable.

Are you Spending Too Much on Rent?

After a hard look at your budget, your rent may be unaffordable because of other financial commitments. If your debt load is increasing or you don’t have enough money to make your debt payments, help is available.

At Adamson and Associates, our Licensed Insolvency Trustees will work with you to find the best solution for your debts. We offer credit counselling and filings for Consumer Proposals and Bankruptcy. If you need help with your debt, please call us at 519-310-5646 for a free consultation. We will help you put your debts behind you so you can get a fresh start.

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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