Question

You are looking for a new apartment in Manhattan. Your income is \(\$ 4,000\) per month, and you know that you should not spend more than 25 percent of your income on rent. You have come across the following listing for one-bedroom apartments on craigslist. You are indifferent about location, and transportation costs are the same to each neighborhood. [LO 1.1] \begin{tabular}{cc} Chelsea & \(\$ 1,200\) \\ Battery Park & 2,200 \\ Delancey & 950 \\ Midtown & 1,500 \\ \hline \end{tabular} a. Which apartments fall within your budget? (Check all that apply.) b. Suppose that you adhere to the 25 percent guideline but also receive a \(\$ 1,000\) cost-of-living supplement since you are living and working in Manhattan. Which apartments fall within your budget now?

Short answer

Delancey; after supplement: Chelsea, Delancey.

Step-by-step solution

Calculate Monthly Budget for Rent

To calculate the maximum amount you should spend on rent, multiply your monthly income by the percentage recommended for spending on rent. Here, your income is \\(4,000 and you shouldn't spend more than 25% of it on rent, so the calculation is:\[\text{Maximum Rent} = 0.25 \times 4,000 = 1,000\] This means you shouldn't spend more than \\)1,000 on rent.

Identify Apartments within Budget

With a rent budget of \\(1,000, you should now compare this to the monthly rent for each apartment listing: 1. **Chelsea**: \\)1,2002. **Battery Park**: \\(2,2003. **Delancey**: \\)9504. **Midtown**: \\(1,500The only apartment that is within your budget is **Delancey** at \\)950.

Adjust Budget with Cost-of-Living Supplement

Now add the \$1,000 cost-of-living supplement to your income, giving a new total income of:\[4,000 + 1,000 = 5,000\]Use 25% of this new income to calculate your new rent budget:\[\text{New Maximum Rent} = 0.25 \times 5,000 = 1,250\]

Identify Apartments within New Budget

With the increased budget of \\(1,250, compare against the rent of each apartment:1. **Chelsea**: \\)1,2002. **Battery Park**: \\(2,2003. **Delancey**: \\)9504. **Midtown**: \\(1,500Now, **Chelsea** and **Delancey** apartments fall within your budget of \\)1,250.

Key concepts

Cost of Living Adjustment

When you decide to live and work in bustling urban areas like Manhattan, you might benefit from a cost of living adjustment. This is a supplemental income or allowance to help offset the higher expense of living in such locations.

The key idea here is that the cost of living in different places can vary significantly. By receiving a cost-of-living supplement, you increase your total available income which in turn can raise your maximum budget for rent.

• In our example, you initially have a monthly income of \(\\(4,000\), with 25% allocated for rent. This results in a rent budget of \(\\)1,000\).
• Receiving an additional \(\\(1,000\) cost-of-living supplement increases your income to \(\\)5,000\). Thus, your rent budget rises to \(\$1,250\).

This type of adjustment makes more rental options available, as seen by comparing your initial budget which only allowed you to consider Delancey apartments, and after the adjustment, Chelsea became affordable too.

Income Percentage for Housing

Determining how much of your income to spend on housing is crucial to maintaining financial health. A widely accepted rule of thumb in budgeting is the 25-30% guideline. It suggests that you should allocate no more than 25-30% of your monthly income towards rent. This percentage takes into account manageable living costs while preventing excessive financial strain.

In our case study:

• Your income is \(\\(4,000\) per month.
• Applying 25% of this amount gives you a rent budget of \(\\)1,000\).

By adhering strictly to this guideline, you ensure you have enough remaining income for other necessities such as groceries, transportation, and savings. This disciplined approach helps avoid overspending on housing, which can lead to financial difficulties.

Apartment Rent Comparison

Before settling on a new home, it's wise to compare the rental prices of available apartments. Consider not just price, but also what you get for that price in terms of amenities, size, and location convenience.
For instance, looking at multiple apartments as indicated, you would compare:

• **Chelsea**: \(\\(1,200\)
• **Battery Park**: \(\\)2,200\)
• **Delancey**: \(\\(950\)
• **Midtown**: \(\\)1,500\)

Initially, only Delancey falls within your budget at \(\$1,000\). However, after your cost-of-living adjustment, Chelsea also becomes affordable. These considerations show the importance of comparing rental costs in line with your budget. It illustrates the trade-off between location, price, and available amenities, helping to guide informed housing decisions.