How much can you afford to spend on rent? The quick answer is 30% of your after-tax income. For most people, spending 30% of their take-home pay on housing will allow them to afford other expenses while saving money for retirement or a rainy day. A better answer is that you need to make a budget. Think of a budget as a spending plan rather than a spending constraint. Follow these steps to figure out how much you can afford to spend on rent. We love it when a plan comes together.

Step 1. Calculate your current income and expenses

The first step to figuring out how much rent you can afford is to identify how you’re currently spending your money. Go through each transaction on your bank statement for the past three months and assign a category to each expenditure (e.g. groceries, transportation, restaurants, hair cuts, etc).  If you make a lot of cash withdrawals and can’t remember where it’s gone, keep receipts of all cash purchases over the next month so you can add them up later. You can use an Excel spreadsheet, Google Sheets or this budget worksheet from Credit Canada.

Then assign each category to one of three types of costs: fixed expenses, savings and discretionary spending. Fixed expenses include essential and predictable costs like groceries, phone, internet, transportation and insurance. Some people may include other things in this category (such as gym memberships, charitable donations and personal grooming) – it depends on your lifestyle and priorities. Discretionary spending includes everything that you could cut back on if you had to, such as going out with friends, clothes, holidays and gifts.

Step 2. Factor in your debt and saving goals

The average North American is carrying a lot of debt. Student loans, car payments, and credit cards add up fast and can be hard to keep track of. Make a list with the name of each lender, your loan balance and the interest rate on the loan. Financial planners usually advise that you should pay off debt with the highest interest rate first. What would you need to pay every month to pay this off in a year? What about 6 months?

Every budget should also include a plan for savings. If you are currently short on savings, your priority should be to start an emergency fund to cover three to six months worth of expenses. Then it’s time to think about your short-term, medium-term, and long-term goals. Maybe you want to buy a new computer or go on holiday this year, or start a business in the next 5 years, and don’t forget about retirement! How much will you have to save every month to reach that goal? Visit a financial advisor (at your bank, for free!) to work out how much you will need for retirement and open an Registered Retirement Savings Plan/401k to help you get there.

Step 3. Make some adjustments

Now for the fun part. Subtract your expenses, debts and savings goals from your income. The remainder is how much you can afford to pay in rent. Not happy with the answer? Time to make some adjustments by considering what trade-offs can be made to your spending categories. Can you ditch your metropass for a more expensive apartment within cycling or walking distance of the office? Would you live with roommates if it meant you could double your entertainment budget? Think about what you’re willing to trade – and what you’re not – to afford an apartment you’ll love while still reaching your financial goals. Online budget calculators like this one from the Royal Bank of Canada are fun tools for this step.