- May 5, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Questioning the Use of Gross Income
This is a genuine question that aims to seek clarity without criticism. It is a common practice for individuals to determine their spending limits based on a percentage of their gross income. For example, allocating 30% for rent or 25% for cars. However, the question arises as to why gross income is used instead of net income.
## Considerations for Net Income
Individuals have varying employment-related expenses such as provincial taxes, union dues, pension contributions, and other deductions. This diversity in fees begs the question of why discussions around income often revolve around gross earnings. Shouldn’t the focus be on the money individuals have access to after accounting for all deductions?
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****** just grabbed a
Net is better. Most people find it too onerous to calculate their net income, or don’t know it offhand when discussing these questions with others.
ikr?.. it can be kinda deceptive….
because my ‘NET’ is after deducting my direct pay into company-matched RRSP program and direct pay into company-advantaged stock purchase plan … so my “NET” is after these kinda like investments makes me kinda poor.
People use gross income because that’s the benchmark that lenders use to determine if you’re qualified for a loan, mortgage, etc. It’s also what “credit repair” people use to determine what payments you can actually make.
Is it wrong?
Absolutely, because most people don’t really have much of a say in their payroll deductions, and have few ways to minimize their tax burden.
I use yearly gross for my tax planning, average monthly net for my budgeting. Plus a lot of financial products want to know gross, so it’s a number I remember.
Financial literacy is very low
It benefits companies that screw people with 10 year financing for a vehicle for instance when they don’t teach basic financial literacy in high school.
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I don’t even know my net income lol
So, that’s why
It’s like dick sizes, you tell the erect figure 😉 Sorry for the crude analogy. But yeah net would be better but then it doesn’t really show the real picture either, net I make 44kish do I make 30$/hr or 40+ because of union dues, company match, pensions, taxes because X province isn’t the same as Y province etc. Bit like saying this Xbox is 500$, someone in AB would know it’s 525 while for most people it’ll be 565 or even more.
Monthly = Net
Annual = Gross
This is how 90% of people budget and estimate their income/affordabiliy in actual corporate jobs.
I have no idea what $100k is per month gross, but I know it’s ~$6k after taxes.
Everyone has different costs why treat taxation costs differently?
It’s easier to start with gross and then make assumptions regarding all your costs.
I mean, it’s a number used as a reference, and those are rules of thumb, not real budgets. We could choose to use net income and say the rule of thumb is 40% or 45% of net income for housing, but instead we use gross income and say 30%. What mostly matters is being clear and consistent: deciding that net income is better and starting to use that instead could well be confusing since we’re used to basing budgets on gross income. Employment offers are in gross income, so it’s gross income that people know best. (I know my gross income to 10% accuracy off the top of my head; I only know my net income to 20% accuracy off the top of my head.)
Also, net income and gross income can be quite different depending on retirement savings. If you save for retirement using pension or RRSP that are deducted from your gross income, the percentage of your net income it makes sense to spend on housing is appreciably higher than if you save for retirement primarily in a TFSA (or for Americans, a Roth IRA), since TFSA funds come out of net income.
And for a car, what you should really consider is some percentage of your after-tax, after-housing, after-retirement income. Maybe 50% of that number on transportation isn’t crazy. Which just underscores that 30% on housing or 25% on a car (which seems high to me, but that’s irrelevant here) is just a rule of thumb, and for a rule of thumb to be useful what matters more is a lingua franca (ie basing it on gross income) than the best-chosen baseline number.
We see people talk about “take-home pay” in this sub all the time. It means wildly different things to different people (does it include retirement contributions? housing? health insurance? car payments?), whereas gross income means more or less the same thing to everyone.
Calculating your expenses on gross income is borderline idiotic. It should always be on your net because that’s what you actually have to spend. If you calculate based on gross, when it comes to pay the bills, don’t be surprised when the math doesn’t add up.
After your first few paychecks, it’s quite easy to figure out what your net income is because it’s on your payroll slip.
Because those are maximums and net income changes.
You can’t just say after tax when rrsp, cpp, ei, fhsa, all impact your after tax incomes.
Doesn’t make sense to me either because a person technically doesn’t have that income they are making plans with lol.
Some people make financial decisions based on gross incomes. Some people make financial decisions without considering incomes altogether.
People choose to do a wide variety of different things.
My friends argued with me on this, and I said it’s because everyone has a different tax strategy.
Employment income makes really no difference, but if you work for yourself, it makes a huge difference depending on tax planning strategies.
I know what I make in a year, but I have no clue what my weekly pretax paycheque is. I know my net down to the penny and for budgeting purposes, I have calculated my net pay/day.
Who are people that actually do this?
Banks due for mortgage lending so that there is one common number but I certainly have never engaged with a person who budgets based on pre-tax earnings.
Because it gives a smaller percentage which tricks people into thinking it is a reasonable amount to spend. 30% of gross on a home sounds better than 50% of net does it not? If people were responsible enough to look at what they have left net after all expenses and diligent savings, they wouldn’t get absurd loans for cars and mortgages they can’t afford and will stress them out while they put the mask on of “happy owners” while their poor financial skills drive them into despair and high interest loans to face any surprises along the way, pushing away any hope of retiring before an age at which medical needs will most likely drain away whatever they have left. The moral of the story is whatever calculation method you use, make sure that the resulting amount fits in your budget and take ownership of your financial decisions without following blindly any formula or advisor.
I think that it is an over simplification, many people don’t know what is their yearly net income. Imagine asking the average person to multiply their bi-weekly pay by 26 and adding/substracting credits and tax returns.
If you want to be precise about it, your net throughout the year is an estimate, only after the end of the fiscal year when your taxes are done does the true net emerge.
Because the numbers are bigger and people are inherently stupid
25% gross income for cars? The 50th percentile for gross income for 30-34 is $50k, who’s buying a car for 12.5k? Is this a car payment? $1k a month on a car payment seems high.
Depends. Many business owners are more interested in bruto, as a vehicle may be a tax write off and be more interested in buying something to increase expenses and lower taxes
Because the system has allowed them to.
IMO, no different than when someone it trying to sell you something and they’re not including tax.
Personally what I care about is the all in price.
Because they can spend more money that way
Because I run a small business and everything I don’t expense is taxable
I had this question as well and what I found is using gross makes comparing situations with other people easier.
Depending on deductions and before tax contributions, two people earning the same gross may have vastly different net pay.
I prefer net and wish a lot of rules of thumbs had net equivalents.
It drives me crazy. I want more analytically driven rules.
I couldn’t tell you. I’ve always assessed affordability off net income. It really doesn’t make sense to factor in income that doesn’t belong to you.
Are you sure you don’t have a DC pension?
Because a lot of people don’t actually know their net
They know their gross tho
Simple, you don’t. My mortgage is 25% of my net income. Now I know I’m safe (while I have said income)
Let’s say two people have 100k income and ignore everything but rrsp deductions.
Person 1 saves 20k into their rrsp so net income is 80k
Person 2 saves nothing. So net income 100k.
Why would person 2 be able to afford a larger house, more expensive car, etc just because they arnt choosing to save money. In reality person 2 is in a worst financial position and should be spending less than they currently are; not more.
It allows them to trick themselves into thinking they can afford more. It has the helpful side effect of making them a debt slave to pay me my dividends. Thanks.
Do they?
I’ve never done that. I always go by what actually lands in my bank account.
I don’t even know how much my gross pay cheque is. I know I make 53,500 yearly salary. But I calculate everything off of the bi-weekly deposits of 1644 that I see. Never made much sense to me to see it that way either.
By gross logic, I can afford a car with 1,114 monthly payments. By net logic, I can afford payments of 890. Which still seems very high to me.
I do agree with one thing though. It is very hard to find anything for rent that’s under 50% of my cheques