Traditional wisdom states that basic housing expenses like rent and utilities should cost no more than 35% of your annual monthly income. We know this is hard to do in today’s economy and housing market, so we recommend a more relaxed percentage of 45%. Quite often the best place to start is by really understanding how much is going out. So, before you work out how much you should be spending on bills, rent and utilities, we recommend you start tracking your existing spending. Here are 6 practical hacks to get you tracking your money today.
For many people, basic living expenses like rent and utilities eat up the majority of one’s income. Even worse, housing and utility prices have shown a steady increase while wages have stalled and become stagnant. Compared to other things like consumer goods, housing has a relatively inelastic demand, meaning that the market can force prices up and people still have to pay.
According to the Office of National Statistics, the typical English tenant paid an average of 27% on housing costs—nearly a quarter of their total gross income.
This value varies significantly depending on location and age. For instance, Londoners on average spend nearly half of their total income (49%) on housing while in northern England this percentage drops to about 23%.
Additionally, millennials on average spend nearly a third of their monthly income on rent and about 12% on mortgages. Despite this, many younger people find themselves living in worse conditions than their parents or grandparents did in the 60s and 70s.
We understand that in today’s economy, housing is more expensive than ever and it can be very difficult to budget a reasonable amount for rent and utilities.
We are here to offer a quick guide covering the basic costs of housing and how much you should be spending on housing every month/year.
What Housing Costs Do I Need to Cover?
The three major things to keep in mind with housing costs are rent, utilities, and any applicable residential taxes.
- Rent: The main amount you pay each month to the landlord. The average one-bedroom flat in the city costs approximately £650 per month and £500 a month outside of the city. This price may fluctuate if energy costs are included in the rent. In general, rent in urban areas is markedly more expensive than non-urban areas.
- Utilities: Utilities cover things like electricity, gas, water, and sewage. Nowadays, most people also include internet bills as a utility as the internet forms an important part of society’s infrastructure. The average monthly cost for electricity, internet, gas, and water in England is around £178. This cost is usually higher in more densely populated areas.
- Taxes: If you live in the UK you have to pay a council tax. The amount of council tax depends on where you live and how many people live with you. Council taxes cover things like trash collection and police and emergency services. The average council tax comes out to about £25 a week.
- Miscellaneous: Some people also include things like rental insurance, food, toiletries, and a mobile phone as housing costs. We include them here as housing costs because everyone needs food and hygienic products to live comfortably.
The first thing you need to do is create a monthly budget of your housing expenses and deduct that cost from your monthly gross income. If you are spending more than you make, you will need to cut some costs to get that number down.
Rent is likely the single biggest housing expense you will have every month. Rent in the city is usually much higher than in non-urban areas.
For example, the average cost to rent a 2-bedroom house in London in 2019 was £1,730 compared to £820 across England. Even the lowest quarter of 2-bedroom houses in London are nearly double the rates found elsewhere in the country. The closer you are to the city centre and the larger the apartment, the greater the rent will be.
For registered social landlords, the average rent for a 2-bedroom house in London is £550, though social rents make unless than a third of private rents in London.
Along with monthly rent, you also need to keep in mind any one time upfront costs such as a security deposit and application fee. If you own any pets, you will likely have to pay an extra portion of rent every month as well.
Given high housing costs in the city, your best bet may be to pick up a roommate or downsize to a smaller apartment.
Experts advise that a person should spend no more than 35% of their income on rent alone. So for example,
- If you make £10,000 after taxes, you should aim to spend around £290 per month on rent.
- If you make £15,000 after taxes, you should try to spend nor more than £440 a month.
- If you make £20,000 after taxes, you should pay £580 a month on rent.
An so on. We understand that in cities it can be essentially impossible to find affordable housing if you make under a certain amount every year, however, the UK government offers several programs to help those struggling with rent payments.
Out of all your housing expenses, your utilities will probably see the most fluctuation from month to month.
Generally, utility costs are higher during the summer and winter when people use more gas and electricity and lower in the spring and autumn.
According to data from Ofgem, the average annual cost for gas and electricity for a household was around £1,200 a year (£120/month), which comes out to about 5% of the average UK household budget.
If you live in a small apartment or have roommates, odds are this amount will be less.
According to Water UK, the average yearly cost of water is £415 (£34.58/month) Water costs depend on location and climate.
For instance, those in the northwest can expect to pay about £18 more a year than the average and those in the southwest usually pay about £14 less than the average. Water usage is usually higher during the summer months when it is hot.
Based on data from Cable.com, the average broadband package in the UK costs consumers around £30 a month.
If you pay more than this every month, you might want to reconsider your broadband package. Perhaps you don’t need the fastest speeds or all those channels.
We are also going to include phone bills here as most people practically need a phone bill to operate in today’s world.
The average Brit spent about £45.60 a month on mobile services.
If you like to get the newest model phone as soon as it comes out, you will be paying substantially more. A good option for cutting phone bill costs is to get a SIM plan so you are only charged for the data that you use.
Overall, experts recommend that utility bills should cost you no more than 10% of your annual income.
- So if you make £15,000 a year, utilities should cost you around £1,500 a year
- If you make £20,000, utilities should be around £2,000 a year
And so on. Utility expense can vary depending on usage, so if you are very frugal with power, gas, water, and internet, you can cut these costs dramatically.
The last bulk of housing expenses needs to cover taxes and food/household necessities like toiletries and cleaning supplies.
In the UK, renters are required to pay a council tax that is determined by where they live and how many people they live with.
The average council tax for a household in the UK is about £25 a week. You can split this cost up even further if you live with other people.
There is also food. Like it or not, you have to buy food to live so we consider food a housing expense.
If you are struggling to hit the magic 35% ratio for housing expenses, food is one area you can dramatically cut costs. Instead of eating out, buy food in bulk and cook at home.
The average cost of a meal in a London restaurant, for example, is about £15.
If you eat out every day, that is almost £450 you are spending on food. Cutting out food costs can bolster your monthly budget so you can better make rent and utility payments.
Putting It All Together
Let’s summarize what we have covered:
- Overall, you should try to spend 35-40% of your annual income on housing expenses.
- The majority of this amount (~25-30%) will be on rent alone
- You should try to spend no more than 10% of your monthly income on utilities like gas, water, electricity, and internet.
- Taxes, food, and household necessities make up the remaining amount of costs.
We understand that in today’s economy it can be really hard to hit the ideal 35%, but it is something you should strive for. If you are struggling with your housing budget, try to find other areas where you can cut costs.