Once a month, finance expert Paco de Leon tackles our pressing questions about all things money, with her signature dose of wit. Here are today’s topics, including how much to spend on rent and what to say when a friend asks for money…
Q: What percentage of your salary should be spent on rent? How much is it okay to deviate from the ‘norm’ depending on where you live (especially an expensive city like New York or San Francisco)? I’ve heard that 30% is the amount to shoot for, but as someone who will make $40k for the next few years, this isn’t feasible for me. — Amanda
A: General financial wisdom says that you should spend no more than 32% of your gross income on housing. Still, I know plenty of people whose rent is 50% of their income, sometimes more. The 32% recommendation is definitely prudent, but the reality of the cost of living in major cities is a tough pill to swallow. You are not alone — it is currently impossible for lots of people to meet this standard.
In order to lower costs in an expensive city, I would try to find roommates, and do your best to live frugally. Cook most of your meals, stay with family and friends when you travel, and learn how to enjoy the free things in life (like my personal favorite, eating all the free snacks at work).
If you’re looking for permission to deviate from the ‘norm’ and spend a large portion of your income on housing costs, there are plenty of people doing it, but know that you’re taking a risk. This is especially true if you can’t afford to save or if you’re going into debt. Things can get precarious quickly.
Your goals, lifestyle and circumstances should drive your financial decisions. There are different types of people living life in all different ways. There are those folks who save 50% (or more!?) of their income and want to retire in their 40s who don’t care where they live as long as it’s cheap. There are people who are huge homebodies for whom it’s worth it to spend a large portion on rent because they cut back in other ways. You have to weigh your values and your goals, and then make decisions that are in line with them.
Q: My friend recently asked to borrow money from me. This person makes decent money and is a bit of a reckless spender. That being said, he’s a good friend and a good person and I want to help. What are your thoughts on lending money to friends and family members? — Theresa
A: If you lend money to someone, it should be money that you don’t need back. So, if they don’t end up paying you back, then it’s all good (kinda). No harm, no foul, and chances are you’ll be able to look past that and continue being friends. But if it’s money you need and you don’t get it back, well, that might be harder to get over. Notarized paperwork and papering the deal in general is a great idea. It’s nice and clean. But, when it comes time to enforce those terms, you have no way of knowing whether or not things will get messy.
You also point out that this person is a reckless spender. If I had extra money, and I knew the person who asked for a loan made oddly prioritized choices about money, I would limit the amount I’d lend them because I wouldn’t expect it back. But if someone needed my emergency fund and they prioritized weird spending, then I would tell them no.
In general, if you want to get out of lending money in a tactful way, saying you can’t afford it is always one option. But if you’re wearing lots of pearls and diamonds and drinking water with gold leaf in it, and you say you can’t afford it, they probably won’t believe you. In that case, you could say it’s because you have joint finances and your partner isn’t cool with it. Or you can simply say you have a hard rule where you don’t lend money to people.
And, now, a mini pep talk: We’re choosing to continue to participate in the modern economy, and it’s super weird and human made and confusing. All we have to do is take a bit of time and attention to acquire financial knowledge little by little. Maybe it’s because I’m a millennial, but I believe in you! Just learn what’s relevant to you right now. That alone is huge.
Paco de Leon is a musician who happens to be killer at finance. Her experience includes business consulting, business management, financial planning, wealth management and even some time at a giant bank. Her experiences led her to found The Hell Yeah Group, a financial firm focused on inspiring creatives to be engaged with their finances and giving them the tools and support to stop freaking out about it.
Thank you so much, Paco! Do you have a money question? Please let us know in the comments below…