For young people, or even not as young people like me, there is no greater personal finance hack than having roommates. There’s simply no easier way to cut monthly expenses quite like slicing the largest expense into pieces.

In high cost of living areas, having a roommate or two can be the difference between thousands of dollars each month. For me, the ability to pay closer to $1,000/month to live in a somewhat larger apartment with roommates as opposed to paying in the neighborhood of $3,000/month for a small studio apartment has essentially doubled my savings rate.

Why roommates are the ultimate personal finance hack

If you don’t live in San Francisco or New York or any other part of the country where rent prices are disgustingly high, I can imagine those numbers might give you a little bit of sticker shock. (I hope they do, because accepting them is even more disgusting). But even in lower cost areas, cutting your rent in half still qualifies as the ultimate personal finance hack available. And it doesn’t stop at the monthly rent check.

With roommates, you’re likely splitting all of the utilities that you would need if you lived on your own. Depending on the place, that might include heat, water, cable, internet, electricity, garbage, and on and on. It would be like splitting the cost of a vehicle with someone—which of course nobody does—and then also getting to split the cost of maintenance, gas, insurance, etc. Imagine how much wiggle room that would buy you each month.

None of this is exactly revolutionary thinking, but it’s amazing how much people are willing to spend on rent. Much like buying more car than you can afford, which I sort of did anyway (as Ben Carlson recently touched on among others), housing costs can wreak havoc on any well-intentioned budget. And even more havoc when there is no such budget to speak of.

How much should you spend on rent?

The numbers are staggering. The general rule of thumb in the personal finance world, or at least the answer that Google will spit out if you ask how much you should spend on your monthly rent, is 30% of your income. In some cases, a lower income in a higher cost-of-living area will make even this impossible.

That $3,000/month studio apartment amounts to an annual $36,000 payment. To keep the math simple, if you’re making a $100,000 salary in San Francisco—which is surprisingly pretty close to the average for households—you’re eating up 36% of your before-tax income. After taxes, you’re looking at closer to half. And that’s the average household. For individuals, the average salary is closer to $75k, which means almost half of your pre-tax salary is going to the roof over your head.

There are plenty of people making well under $100k who are paying well over $3,000, and even $4,000, per month on rent. They’re stuck in quicksand right out of the starting block.  

Comparing your daily rent to hotel prices

To help train myself into avoiding these egregious rent prices, I like to break it down to individual daily payments. Prices obviously vary by region, but if you were to rent a hotel room in Anytown, USA, you could expect to pay in the ballpark of $120/night for something decent. In my case, my nightly room rate at my apartment comes to around $33/night, which is rightfully much cheaper. That San Francisco studio clocks in at closer to $100/night, almost a wash. Keep going up to $4,000, and you’re looking at a $133 nightly rate—more than a standard hotel and the amenities that come with it. These “nightly rates” shouldn’t even be close.

The most demoralizing part of renting is that you are, as non-renters like to say, throwing your money away. As in, you aren’t paying down an asset that you will eventually own. While I generally disagree with this notion—you are buying yourself flexibility in my mind—it certainly would be nice to have something to show for years of renting in the same residence.

Living with roommates during the COVID-19 pandemic

While there is an appeal to living alone, the current pandemic would have led to a lonely existence. For sanity’s sake alone, it’s beneficial to interact with fellow humans, especially while working from home. By that same token, the pandemic has led many away from renting in cities entirely in favor of buying property and enjoying backyards in the burbs.

In the short term, this could lead to an opportunity for lower rent prices in traditionally higher cost-of-living areas, which will allow for younger renters—and non-tech employees—to take residence in these parts of the country. But I suspect rents will eventually creep back upwards and continue to eat up an inordinate amount of money for single-dwellers.

Don’t be afraid to check your local Craigslist listings and find yourself a roommate to help foot the bill. If you’re moving to a new location, roommates provide a built-in network of people as you begin to formulate a new social circle. There’s nothing worse than listing your boss as your emergency contact. But make no mistake, the financial ramifications of living with roommates is reason enough. It’s the ultimate personal finance hack.