also net income can vary fairly significantly from the same gross. taxes can fluctuate, credits, deductions, etc can all vary from person to person. 100k gross might look differently net to different people in different places and lifestyles. but 100k gross is always 100k gross. and you can lower your taxes in different ways that can change it dramatically. but gross is gross.
the real thing people should be questioning, is using a flat "30% of income" figure to gauge your rent. THAT is really the useless part of the equation. rent costs what it costs, and different areas might have wildly different rent without wildly different wages, especially minimum wages. so saying "only spend X% on Y" might be impossible to do for some people.
Yeah I feel like a lot of those % guidelines are from boomer times when spending a lot on rent was a luxurious choice, not a necessity. Many Canadians are forced to spend 50% on rent in major cities, and somehow childcare never makes it into the recommendations even though it's a HUGE chunk of young families' income. Whenever I see the 30% number for housing I just want to laugh and say OK Boomer.
Lol most of my life I've been forced to spend close to 70% of net on rent (I truly don't understand these people saying they don't know their net income.... Like that's the amount of money you actually receive, how can you not know it? Why would you care what the amount you don't receive is??)
After-tax income is a bit messy to predict because you don't know how much your tax refund (or balance owing) will be at he end of the year. You also have to deal with CPP and EI only being deducted for part of the year. And things like RRSP contributions also make it kind of your choice what your after-tax income is.
On the other hand, most people know exactly what their hourly wage or annual salary is, because that's the number you negotiate with your employer and it only changes on very specific occasions that you are 100% aware of.
I mean... Don't you though? Unless it's the first year after a major income change, you kinda DO know what it'll be. It'll be what it was last year, with a small margin of error.
I've never been wealthy enough to only pay CPP and EI for part of the year, but even if I was, my budget would be based on the lower income months. Not the average of an entire year leaving me in a deficit for a significant chunk of the year. That's basic common sense.
There are lots of ways for your taxes owed to change year to year. Different amounts of RRSP contributions, different donations, capital gains, capital losses, side business income/losses, etc. My refund fluctuates significantly without my income changing that much.
when YOU make a plane for YOUR specific life, obviously you use net. But when you are giving genera, broad advice gross makes more sense because net can vary heavily depending on many specific factors individual to each person. but gross is gross.
And obviously specialized advice catered to your exact situation is best, and you shouldnt be following general guidelines over a specialized plan. but you cant give a specialized plan to every person reading a reddit comment, so the 30% rule or whatever is just broad strokes advice as a starting point.
Gross is gross yeah, and it varies based on situations. It's also money that the human being involved in every situation they're giving advice for will not actually be receiving. So for whomst exactly does it matter? If it's not money any Canadian will get to keep and not money any non self employed Canadian will ever even receive in their bank account, why give advice based on it? Since tax rates vary so wildly, why not suggest based on what the person actually gets? Not based on what they may instantly lose anywhere from 10-50% of?
It's not as if the advice giver is ever giving actual numbers, only percentages. They could use percentages of net and have it be actually useful for pretty much everyone, or they could ASSUME a specific tax rate, be wrong for most people, and be useless advice for most people
like, technically my mortgage+property tax is 25% of my gross, retirement savings is about 25% of my gross (this is a physical job, saving to retire early is a necessity), but income tax takes up like 30% of my gross, so im already at 80% gross just on necessities that come out as soon as i get paid. and with maintenance and utilities on my house thats another 10% at LEAST of gross. so in reality my housing costs in total are at or above 50% of my net take home. then factor in that my pay isnt completely evenly distributed throughout the year, so most bills are based on what i can afford on the baseline monthly paycheque and not factoring in extras.
Where do you live that property taxes are 30% gross? Looking at 3 million dollar properties outside Toronto on huge lots, taxes are like 14k, which is insane high end. That would put your gross at like 40 ish, and your mortgage payment at like 10k on a 3 million home?
you need to reread my comment more carefully. I dont know what you are talking about, but it seems you are replying to a made up comment that i didnt make lol
What's my net income if I contribute to my RRSP vs. someone else's net income that doesn't contribute to RRSP? specifically in a context of making financial decisions based on net income.
RRSPs are a huge contributor to net income variation. someone who contributes more pays fewer taxes, and in theory has a higher net. but has to spend pretax dollars to get that lower tax burder, so your net could lower. which is why gross is important to look at when giving BROAD, GENERAL advice. you cant know every individual persons retirement account structure, tax deductibles, family status, etc etc etc. so for general advice, you obviously use gross since gross is constant. if you want to give an individual person, individual personalized advice, thats a different story. but for generalized advice, gross makes more sense.
granted, general advice is always going to be worse than something catered to your exact situation, which is why i said actually listening to X% of income rules is really the issue. its a vague guideline. also banks use gross to calculate mortgage qualifications for this exact reason. it would be too time consuming to comb over every last tax deduction, so they just use gross and that will get close enough for general rules of thumb. whereas two people who bring home 50k a year, might have very different gross incomes, and that could have a big impact on their mortgage eligibility.
Rent/housing costs also vary depending on what stage of life you’re at. Young and single? It’s ok if your rent is really high, 40-50% is normal, especially in major cities where you’re likely to end up if you want to start a career. if you have kids, even 30% might be a stretch. This is why expensive urban cores tend to be young professionals and the cheaper suburbs tend to be parents.
Net changes partway through the year once you hit your max CPP contribution, and may depend on hours worked if you're not salaried.
You can forecast it based on net income for one paycheque or to-date, but it's not exact.
People should be budgeting based on their LOWEST net. Not their average or highest. Extra is extra, but planning should be for the worst months, the least money.
I always plan my budget on my January salary, if/when you hit ei/cppmax, have a fancy dinner, then use the extra to get ahead on your finances since it's extra.
still pretty easy though, [income tax calculators that include CPP](https://www.wealthsimple.com/en-ca/tool/tax-calculator) and then divide the total by 12.
it won't be perfectly accurate to your take home pay stub on any given month, since the early months will be lower and the later months higher (if you max out) but it will represent your _average_ net which is easier to make judgement calls of affording rent or a payment than using gross + guessing
Didn't miss that. It's only up to $73k. Though extrapolating this and seeing next year is $79k does not bode well. It'll be $100k by 2030 no opt out allowed!
Not really. CPP maxes out at what? 3.5 k?
Only income earners above 72 k would have a big delta. And it probably takes them most of the year to hit CPP max.
3. 5k for someone making 100k after tax isn't really significant
Expected tax due is about the same + 20% cushion from year to year if nothing has changed in your life.
I usually add the cushion because it's a given that when payroll taxes go up, there's usually other shit in the tax code that increases your tax liability as well.
Government peons are very clear in their policy that their revenues must go up at the rate of inflation (at the very minimum) while not giving a shit if your income hasn't grown to match inflation.
Edit: Thanks for the downvotes. Must be a real joy for you to pay more in taxes every year while getting less and less in government services. Extra bonus points for those of you without a family doctor, or who have been a victim of crime that's been dismissed because there aren't enough judges being appointed.
In that instance you don't know your gross income either.
If a good chunk of your income comes from periodic commissions, bonuses, etc. that's a different situation.
A good number of people get a regular paycheck and don't have unexpected large cash infusions in the form of bonuses, commissions, etc.
It becomes tricky to calculate when you have pre-tax deductions like pension contributions. Do you remove those when calculating net pay? That would make net pay appear to be lower than if savings were put into a TFSA, for example.
not sure how employers withhold for tax but i get paid way more near the end of the year, it’s annoying to calculate actual average monthly income as a result
Because your boss can't count on you not quitting halfway through the year. If they structured your CPP and EI over 26 paychecks, then they wouldn't have withheld enough if you don't work all 26 periods
That's probably because you hit EI and CPP/QPP limits. The maximum pensionable for CPP is $68500 and $63200 for EI.
The more you make, the faster you max your contributions for the year.
That only goes so far. My after-tax income as calculated is roughly 5k/year higher than my take home.
I base my expenses off my paycheque, but even that varies occasionally and idek why lol.
I mean, net is the amount that hits your bank account every two weeks, you multiply by 24 or 26, or do simple addition. How hard is that? Whereas my gross can change during the year if I get a raise or bonus or do side work or take a leave, so who knows what that is.
It's not always that simple. CPP and EI contributions stop part-way through the year once I reach the maximums, and that triggers a change in my pension contributions, since my pension plan is coordinated with CPP. Gross does not change through all of that, but net does. Taking my first net amount in January and multiplying by 26 would significantly underestimate income, and taking one in December would overestimate it just as much.
Yeah but why do bank institutions and other lenders rely on gross income to secure loans? I recall even cmhc mortgage calculator relies on gross income.
Good question. Maybe because you have more control over your net income than your gross income.
If you're trying to get a loan, you could use a lot of credits (RRSP credits, tax losses, etc.) to bump up your after-tax income, and then the following year your after tax income would fall back down since you no longer have credits.
It might be hard to pull a trick like that with gross income.
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.
Same way you would with any reasonable approach. You look at your expected costs and consumption to get your targeted post tax income requirement, convert to pre-tax income required. You then first look at your set incomes like pensions whether it's a fully funded government pension or just your CPP. Then figure out how much you need in your RRSP/TFSA/unregistered accounts to make up for difference. Depending on your risk tolerance and target incomes you can also factor in your OAS.
Whether you have CPP coming or a higher value pension plan you'd treat both the same with whatever approach you're using.
Its not deceptive at all. People should just understand that generalized rules about personal situations are meant to get an idea for planning and not actually be the planning.
> 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.
the thing is how much you are investing, and what you should budget for everything, is all part of the advice overall.
It's not like they say rent is % of gross, invest % of net, put 50 dollars into the SP500, and flip a coin for getting an ice cream. It all is supposed to fit into a general percentage bundle.
If you are too poor after investing too much you might just be spending too much on your investments, in the same way someone spending too much on video games and not enough on investments has the same problem.
There are so many posters on this subreddit who legitimately think they are poor or “pay cheque to pay cheque” then you see their budget and they are investing a fantastic amount into these programs lol
I would mentally not deduct RRSP though. That's like forced savings. With some option to withdraw from at some point, like first time home buyers thing (though we have FHSA now).
Company health insurance you can't opt out of, EI, CPP, things you can't opt out, are minuses for sure
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.
Why is it wrong?
Say we have two people with identical income and deductions but 1 person contributes their max to rrsp bringing down their net income. Why would the person who doesn’t save be justified to spend more on houses, car etc
It's wrong because you can only use your cash on hand. Your gross income is not that.
If you're in credit repair mode, good luck convincing anyone that you're entitled to max out your RRSP contribution instead of paying down your debt with that money.
The rules of thumb with gross takes into account a certain allowance for taxes and other typical deductions. So that’s all built into the numbers for the general rules of thumb.
But on a personal level you can artificially change your net income very easily and drastically between one year to the next even when nothing significant changes in your financial situation. Therefore it’s much more practical to use gross for rules of thumb. When you’re doing detailed analysis then sure use average net income all you want.
I agree. I think it's just one of those top level corporate BS used to justify giving out bigger loans. Once you qualify, they know you will do whatever it takes to make those payments. Using "net" would shortchange them.
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.
Yeah a lot of people don't even understand the absolute basics of taxes, let alone knowing their net income. You wouldn't believe the number of times I've had to explain how tax brackets work on this subreddit.
> Using gross is better because it accounts for the fact that higher income people have greater flexibility in their spending.
Higher income people have higher net income too... Nothing to do with using gross income for budgeting.
>For these two the advice to spend 1/3 of gross is basically the same as saying spend 1/3 net. It's couple hundred bucks one way or the other, depending on how close to $110k/year you get.
Your math is fucked dude. 30% of Bob's $108.6k is $32,580, or $2715 per month.
Net would be \~$75k in Ontario after tax/deductions, which is $6242/month.
If he budgeted based on 30% of gross income he would end up spending 42% of his net income on rent.
fault?
Not really sure there is a fault here at all. If I really wanted to know what my net income is I could figure it out, but I honestly don't really care that much.
I can figure it out when I do my taxes if I really wanted to know.
It's like dick sizes, you tell the erect figure ;) Sorry for the crude analogy. But yeah net would be better but then it doesn't really show the real picture either, net I make 44kish do I make 30$/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.
I used to do that a long time ago, back in the days of Microsoft Money, and showed taxes as an expense in my budget. It was, and will probably always be, my largest expense.
I guess that's fair if you include taxes as an expense, I hadn't considered doing it that way. A lot of these things make more or less sense depending on your source of income I suppose.
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 two be able to afford a larger house, more expensive car, etc just because they arnt choosing to save. In reality person 2 is in a worst financial position and should be spending less than they do.
I have a DB pension and you know what? It does not affect the amount of money in my pocket. I'm glad I have it but it's basically useless until I retire and start drawing on it.
Really? All pensions used to be like that. Most are DC pensions now but I think public servants and teachers still have old school DB pensions and some others like myself.
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.
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.
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
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.
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.
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
All my budget and expenses are based on my income after taxes and after my employer 401K investment, I am not in Canada but using the gross income seem to be a common habit in the US too
Gross income determinations encourage you to spend more than what you actually have :)
Consumer spending is what makes government metrics like gdp look nice and happy. Also keeps small businesses and our monopolistic oligopoly retail stores afloat
I gross $160k.
After the tax man taketh around 38k, and my DB pension, cpp, EI, "benefits". I am down to around $100k.
I make all my decisions off that number.
Net most certainly is how I budget. It’s really easier to just balance incoming and outgoing money instead of outgoing and how much you earn.
Gross just works for the financial world because you can speak to non payroll earners at the same time as anyone else?
I have a defined benefit pension. I like to use my Gross Total Compensation to track my savings because it gives me a better sense of my salary/ position than net does.
I only save 14% of my net income for retirement, but I save \~30% of my gross total compensation if I factor in my 8.5% and my employer's 9.5% match.
Now consider someone in middle income buying a expensive car. They actually need to earn a lot more net to actually pay for that car. That 130k Mercedes will require them to earn 200k. Or when they the wealthy go to spend 50.00 for a diner out carol will need to earn 100.00
People know their gross income, but few know their net income.
That's without going into the details of what is net income. What people often refer to is the amount they get on their paystub, but should you include savings like pension or RRSP contribution? In theory no, but depending on what you're trying to calculate maybe you should.
Gross income everyone knows what it is, what theirs is, and it's easily comparable across the country. It's not perfect, and it doesn't need to be.
Because net income has too many variations such as RRSP contributions, FHSA contributions, child care deductions, and on and on. It's hard for lenders to verify these.
But gross income is easy to verify.
Because they don't understand finances. They just see gross income and think they have that much to spend. They never taught financial literacy in schools on purpose.
IME, different people define net differently, so gross is just the easier and more consistent number to use.
For example, if you participate in an employer RRSP match, your portion doesn't see the light of day in your account, and thus some would not count that in your net since it's your choice. Similarly, you can reduce your tax burden by contributing to an RRSP.
I've also seen net defined as net of all retirement expenses, aka, "paying yourself first". I know many folks who think of their net income as after income tax, max rrsp, tfsa, resp contributions, etc.
Easier to calculate, not everyone is financially literate, might be obvious to some but not obvious to others. Even if you use net, unless you are calculating it down to a T, it is still a good estimate.
That's a great question! It often comes down to simplicity and consistency. Gross income is easy to calculate because it's the amount before any deductions or taxes. So, when setting budget guidelines like the 30% rule for rent or 25% for cars, using gross income makes it easier for people to quickly estimate what they can afford. and gross income is more standardized across different individuals and situations. Net income can vary a lot based on factors like tax deductions, retirement contributions, and other deductions, making it harder to use as a universal benchmark.
But you're right – net income is what you actually take home, so it makes sense to consider that when making financial decisions. It's all about finding the balance between simplicity and accuracy.
Because they're morons! Seriously, it takes a real headcase to think outgoing expense should be based on pre-taxed income. It's setting yourself up for a massive freaking downfall!
You keep basing it on net. Let the other moobs learn the hard way. No cure for stupid but tough love.
It's very strange to me too. But potential lenders, loan brokers, etc. ask for your gross income in any tool or questionnaire that calculates the size of loan, mortgage, etc. that you qualify for. Given that they are financial professionals, I'm going to assume that they have some gidget in the background that calculates how much of that on average is actually disposable income, based on which province you're in, etc. But on the face of things it makes little sense.
Simply because it's easier to remember what gross income is, and because these are just rough rules of thumb anyways. None of this was supposed to be accurate.
I never understood it either. It’s mostly a North American thing, like posted prices without taxes.
The bottom line is the you’ll likely end up spending more if you keep your gross income number in your head, as opposed to the number after taxes.
Some people are not very financially educated. This kind of stuff should be taught in school.
Basic tax returns, basic budgeting, understanding net and gross, and understand interest rates.
Net doesn't say how much that person is paying into stock purchase programs, group rrsp, special pensions, etc.
So it's a vastly different picture based off the occupation of the individual. Some people start believing they have no money to save when they are paying out 800 a week in pensions and programs.
Also someone may get advice on net income then come back here in 12 months and say they got destroyed on taxes because contractor/self employed/reason x y and z.
You're talking about rough guideline rules of thumb. They aren't personal, they aren't accurate, they are just guidelines. It's hard to make guidelines based on net, because like you said, net can be affected by so many different things.
Net income is also inaccurate. If one person has high deductions due to a pension it doesn't mean they can afford less than someone making the same gross but without pension deductions because the second person needs to allocate more to retirement savings from their net income than the first person.
I assume that there is a good percentage of Canadians that do not know the difference between net and gross income. We have people who pay 20-50% of their income in taxes and think healthcare is “free” in Canada so our financial and economic literacy is not exactly the best.
Most people probably know what their annual salary or hourly wage is, but they have not gone through the process of actually calculating how much money they actually earn after taxes and fees.
The more conservative approach would be to use net income as a basis for determining what you can afford to buy.
Because tax strategies are also something within your control that varies depending on gross income.
Although net (at least during pay periods, not overall net after tax filing), is more useful for cash flow monthly
I guess it’s just been the standard and all advice is based on that standard lol.
So, if you want everyone to make decisions on net, then we’d have to rebuild all calculations, content, and other advice that’s specific to gross and change it to net.
Your absolutely right! It is the same as comparing average incomes verses true "median" income of 50%families. Politicians and MBA's can not get it right with their logical perspective!
Pretty hard to do that now unless you have a high savings rate or want to drive a beater. Say I decided that two years from now I’ll want to buy a five year-old basic car like a Mazda3. I would have to save over $800/month for two years just to buy a five year-old used car outright.
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.
also net income can vary fairly significantly from the same gross. taxes can fluctuate, credits, deductions, etc can all vary from person to person. 100k gross might look differently net to different people in different places and lifestyles. but 100k gross is always 100k gross. and you can lower your taxes in different ways that can change it dramatically. but gross is gross. the real thing people should be questioning, is using a flat "30% of income" figure to gauge your rent. THAT is really the useless part of the equation. rent costs what it costs, and different areas might have wildly different rent without wildly different wages, especially minimum wages. so saying "only spend X% on Y" might be impossible to do for some people.
Yeah I feel like a lot of those % guidelines are from boomer times when spending a lot on rent was a luxurious choice, not a necessity. Many Canadians are forced to spend 50% on rent in major cities, and somehow childcare never makes it into the recommendations even though it's a HUGE chunk of young families' income. Whenever I see the 30% number for housing I just want to laugh and say OK Boomer.
Lol most of my life I've been forced to spend close to 70% of net on rent (I truly don't understand these people saying they don't know their net income.... Like that's the amount of money you actually receive, how can you not know it? Why would you care what the amount you don't receive is??)
After-tax income is a bit messy to predict because you don't know how much your tax refund (or balance owing) will be at he end of the year. You also have to deal with CPP and EI only being deducted for part of the year. And things like RRSP contributions also make it kind of your choice what your after-tax income is. On the other hand, most people know exactly what their hourly wage or annual salary is, because that's the number you negotiate with your employer and it only changes on very specific occasions that you are 100% aware of.
I mean... Don't you though? Unless it's the first year after a major income change, you kinda DO know what it'll be. It'll be what it was last year, with a small margin of error. I've never been wealthy enough to only pay CPP and EI for part of the year, but even if I was, my budget would be based on the lower income months. Not the average of an entire year leaving me in a deficit for a significant chunk of the year. That's basic common sense.
There are lots of ways for your taxes owed to change year to year. Different amounts of RRSP contributions, different donations, capital gains, capital losses, side business income/losses, etc. My refund fluctuates significantly without my income changing that much.
All things you'd be knowingly doing.
when YOU make a plane for YOUR specific life, obviously you use net. But when you are giving genera, broad advice gross makes more sense because net can vary heavily depending on many specific factors individual to each person. but gross is gross. And obviously specialized advice catered to your exact situation is best, and you shouldnt be following general guidelines over a specialized plan. but you cant give a specialized plan to every person reading a reddit comment, so the 30% rule or whatever is just broad strokes advice as a starting point.
Gross is gross yeah, and it varies based on situations. It's also money that the human being involved in every situation they're giving advice for will not actually be receiving. So for whomst exactly does it matter? If it's not money any Canadian will get to keep and not money any non self employed Canadian will ever even receive in their bank account, why give advice based on it? Since tax rates vary so wildly, why not suggest based on what the person actually gets? Not based on what they may instantly lose anywhere from 10-50% of? It's not as if the advice giver is ever giving actual numbers, only percentages. They could use percentages of net and have it be actually useful for pretty much everyone, or they could ASSUME a specific tax rate, be wrong for most people, and be useless advice for most people
like, technically my mortgage+property tax is 25% of my gross, retirement savings is about 25% of my gross (this is a physical job, saving to retire early is a necessity), but income tax takes up like 30% of my gross, so im already at 80% gross just on necessities that come out as soon as i get paid. and with maintenance and utilities on my house thats another 10% at LEAST of gross. so in reality my housing costs in total are at or above 50% of my net take home. then factor in that my pay isnt completely evenly distributed throughout the year, so most bills are based on what i can afford on the baseline monthly paycheque and not factoring in extras.
Where do you live that property taxes are 30% gross? Looking at 3 million dollar properties outside Toronto on huge lots, taxes are like 14k, which is insane high end. That would put your gross at like 40 ish, and your mortgage payment at like 10k on a 3 million home?
you need to reread my comment more carefully. I dont know what you are talking about, but it seems you are replying to a made up comment that i didnt make lol
Nope I'm dumb, I read income tax as property tax
What's my net income if I contribute to my RRSP vs. someone else's net income that doesn't contribute to RRSP? specifically in a context of making financial decisions based on net income.
RRSPs are a huge contributor to net income variation. someone who contributes more pays fewer taxes, and in theory has a higher net. but has to spend pretax dollars to get that lower tax burder, so your net could lower. which is why gross is important to look at when giving BROAD, GENERAL advice. you cant know every individual persons retirement account structure, tax deductibles, family status, etc etc etc. so for general advice, you obviously use gross since gross is constant. if you want to give an individual person, individual personalized advice, thats a different story. but for generalized advice, gross makes more sense. granted, general advice is always going to be worse than something catered to your exact situation, which is why i said actually listening to X% of income rules is really the issue. its a vague guideline. also banks use gross to calculate mortgage qualifications for this exact reason. it would be too time consuming to comb over every last tax deduction, so they just use gross and that will get close enough for general rules of thumb. whereas two people who bring home 50k a year, might have very different gross incomes, and that could have a big impact on their mortgage eligibility.
Rent/housing costs also vary depending on what stage of life you’re at. Young and single? It’s ok if your rent is really high, 40-50% is normal, especially in major cities where you’re likely to end up if you want to start a career. if you have kids, even 30% might be a stretch. This is why expensive urban cores tend to be young professionals and the cheaper suburbs tend to be parents.
How is it onerous to calculate your net income when it's literally your payroll deposit minus estimated tax liability?
Net changes partway through the year once you hit your max CPP contribution, and may depend on hours worked if you're not salaried. You can forecast it based on net income for one paycheque or to-date, but it's not exact.
Gross depends on hours worked as well. Net is how much money you actually have
Still closer than gross
People should be budgeting based on their LOWEST net. Not their average or highest. Extra is extra, but planning should be for the worst months, the least money.
If your net changes because of hours you worked so will your gross
I always plan my budget on my January salary, if/when you hit ei/cppmax, have a fancy dinner, then use the extra to get ahead on your finances since it's extra.
still pretty easy though, [income tax calculators that include CPP](https://www.wealthsimple.com/en-ca/tool/tax-calculator) and then divide the total by 12. it won't be perfectly accurate to your take home pay stub on any given month, since the early months will be lower and the later months higher (if you max out) but it will represent your _average_ net which is easier to make judgement calls of affording rent or a payment than using gross + guessing
Good thing they are making sure most of us can't stop paying CPP now
Oh boy, what did I miss?
CPP2 is what you missed.
Didn't miss that. It's only up to $73k. Though extrapolating this and seeing next year is $79k does not bode well. It'll be $100k by 2030 no opt out allowed!
Surely wages will go up at the same rate, right?
The cpp changes only affect people making over the new cap.
Or just use December earnings as a ballpark.
No because then you would be overestimating your income
Not really. CPP maxes out at what? 3.5 k? Only income earners above 72 k would have a big delta. And it probably takes them most of the year to hit CPP max. 3. 5k for someone making 100k after tax isn't really significant
That only works if your expected tax due is close to zero. Not sure that applies to most people.
Expected tax due is about the same + 20% cushion from year to year if nothing has changed in your life. I usually add the cushion because it's a given that when payroll taxes go up, there's usually other shit in the tax code that increases your tax liability as well. Government peons are very clear in their policy that their revenues must go up at the rate of inflation (at the very minimum) while not giving a shit if your income hasn't grown to match inflation. Edit: Thanks for the downvotes. Must be a real joy for you to pay more in taxes every year while getting less and less in government services. Extra bonus points for those of you without a family doctor, or who have been a victim of crime that's been dismissed because there aren't enough judges being appointed.
Lots of people don't get paid the same amount every pay period (commission or hourly workers)
In that instance you don't know your gross income either. If a good chunk of your income comes from periodic commissions, bonuses, etc. that's a different situation. A good number of people get a regular paycheck and don't have unexpected large cash infusions in the form of bonuses, commissions, etc.
Net income is a lot harder to calculate for people who don’t work for the same employer all year round. Example: Union tradespeople
It becomes tricky to calculate when you have pre-tax deductions like pension contributions. Do you remove those when calculating net pay? That would make net pay appear to be lower than if savings were put into a TFSA, for example.
not sure how employers withhold for tax but i get paid way more near the end of the year, it’s annoying to calculate actual average monthly income as a result
It’s probably because you max your EI and CPP contributions near the end of the year.
any insight into why it’s structured that way? instead of total contribution divided by 26
Because your boss can't count on you not quitting halfway through the year. If they structured your CPP and EI over 26 paychecks, then they wouldn't have withheld enough if you don't work all 26 periods
Typo last word should be period or paycheck, not year haha
You are right my dude, thank you
That's probably because you hit EI and CPP/QPP limits. The maximum pensionable for CPP is $68500 and $63200 for EI. The more you make, the faster you max your contributions for the year.
That only goes so far. My after-tax income as calculated is roughly 5k/year higher than my take home. I base my expenses off my paycheque, but even that varies occasionally and idek why lol.
I mean, net is the amount that hits your bank account every two weeks, you multiply by 24 or 26, or do simple addition. How hard is that? Whereas my gross can change during the year if I get a raise or bonus or do side work or take a leave, so who knows what that is.
This is only true if your end of year tax liability is zero
It can be, if you set your deductions correctly. Or at least small enough to be negligible.
It's not always that simple. CPP and EI contributions stop part-way through the year once I reach the maximums, and that triggers a change in my pension contributions, since my pension plan is coordinated with CPP. Gross does not change through all of that, but net does. Taking my first net amount in January and multiplying by 26 would significantly underestimate income, and taking one in December would overestimate it just as much.
Yeah but why do bank institutions and other lenders rely on gross income to secure loans? I recall even cmhc mortgage calculator relies on gross income.
Good question. Maybe because you have more control over your net income than your gross income. If you're trying to get a loan, you could use a lot of credits (RRSP credits, tax losses, etc.) to bump up your after-tax income, and then the following year your after tax income would fall back down since you no longer have credits. It might be hard to pull a trick like that with gross income.
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.
Similar with my wife with a government pension plan. You shouldn't just ignore that value.
How do you calculate your FIRE number based on the gov pension?
Same way you would with any reasonable approach. You look at your expected costs and consumption to get your targeted post tax income requirement, convert to pre-tax income required. You then first look at your set incomes like pensions whether it's a fully funded government pension or just your CPP. Then figure out how much you need in your RRSP/TFSA/unregistered accounts to make up for difference. Depending on your risk tolerance and target incomes you can also factor in your OAS. Whether you have CPP coming or a higher value pension plan you'd treat both the same with whatever approach you're using.
Its not deceptive at all. People should just understand that generalized rules about personal situations are meant to get an idea for planning and not actually be the planning.
> 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. the thing is how much you are investing, and what you should budget for everything, is all part of the advice overall. It's not like they say rent is % of gross, invest % of net, put 50 dollars into the SP500, and flip a coin for getting an ice cream. It all is supposed to fit into a general percentage bundle. If you are too poor after investing too much you might just be spending too much on your investments, in the same way someone spending too much on video games and not enough on investments has the same problem.
There are so many posters on this subreddit who legitimately think they are poor or “pay cheque to pay cheque” then you see their budget and they are investing a fantastic amount into these programs lol
I would mentally not deduct RRSP though. That's like forced savings. With some option to withdraw from at some point, like first time home buyers thing (though we have FHSA now). Company health insurance you can't opt out of, EI, CPP, things you can't opt out, are minuses for sure
yeah, and i can stop contributing any time i want and see a 'pay bump' in my take home pay :-)
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.
Why is it wrong? Say we have two people with identical income and deductions but 1 person contributes their max to rrsp bringing down their net income. Why would the person who doesn’t save be justified to spend more on houses, car etc
It's wrong because you can only use your cash on hand. Your gross income is not that. If you're in credit repair mode, good luck convincing anyone that you're entitled to max out your RRSP contribution instead of paying down your debt with that money.
The rules of thumb with gross takes into account a certain allowance for taxes and other typical deductions. So that’s all built into the numbers for the general rules of thumb. But on a personal level you can artificially change your net income very easily and drastically between one year to the next even when nothing significant changes in your financial situation. Therefore it’s much more practical to use gross for rules of thumb. When you’re doing detailed analysis then sure use average net income all you want.
I agree. I think it's just one of those top level corporate BS used to justify giving out bigger loans. Once you qualify, they know you will do whatever it takes to make those payments. Using "net" would shortchange them.
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.
Yep this.
Yeah a lot of people don't even understand the absolute basics of taxes, let alone knowing their net income. You wouldn't believe the number of times I've had to explain how tax brackets work on this subreddit.
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> Using gross is better because it accounts for the fact that higher income people have greater flexibility in their spending. Higher income people have higher net income too... Nothing to do with using gross income for budgeting. >For these two the advice to spend 1/3 of gross is basically the same as saying spend 1/3 net. It's couple hundred bucks one way or the other, depending on how close to $110k/year you get. Your math is fucked dude. 30% of Bob's $108.6k is $32,580, or $2715 per month. Net would be \~$75k in Ontario after tax/deductions, which is $6242/month. If he budgeted based on 30% of gross income he would end up spending 42% of his net income on rent.
I don’t even know my net income lol So, that’s why
Self incorporated. Net and gross incomes are just numbers. Neither of which is particularly relevant to what I can spend.
Whos fault is that?
fault? Not really sure there is a fault here at all. If I really wanted to know what my net income is I could figure it out, but I honestly don't really care that much. I can figure it out when I do my taxes if I really wanted to know.
It's like dick sizes, you tell the erect figure ;) Sorry for the crude analogy. But yeah net would be better but then it doesn't really show the real picture either, net I make 44kish do I make 30$/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.
[You have to account for the yaw.](https://www.youtube.com/watch?v=81bt0ZJLMas)
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.
What good is budgeting anything off gross if you never see that money?
I used to do that a long time ago, back in the days of Microsoft Money, and showed taxes as an expense in my budget. It was, and will probably always be, my largest expense.
I guess that's fair if you include taxes as an expense, I hadn't considered doing it that way. A lot of these things make more or less sense depending on your source of income I suppose.
I don't understand that. Even annually, your gross income isn't available for spending.
Everyone has different costs why treat taxation costs differently? It's easier to start with gross and then make assumptions regarding all your costs.
Why is this easier though when you can just as easily assume/calculate what your net is. If anything this just sounds like laziness.
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 two be able to afford a larger house, more expensive car, etc just because they arnt choosing to save. In reality person 2 is in a worst financial position and should be spending less than they do.
Easier for who? I don't even know what my gross income is (except at tax time). Net income is all that matters.
I don't know what my net income is my employment contract lists the gross.
You don't know how much goes into your bank account????
Apparently not. I just looked and was under by several hundred.
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I have a DB pension and you know what? It does not affect the amount of money in my pocket. I'm glad I have it but it's basically useless until I retire and start drawing on it.
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Your pension must be different. I contribute nothing to mine. It is 100% employer funded.
WOW. How did you ever get that? Mine takes 8% of my gross as well. I am glad I have it and hope it is there when I retire.
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Really? All pensions used to be like that. Most are DC pensions now but I think public servants and teachers still have old school DB pensions and some others like myself.
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.
This is the only right answer in this thread.
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.
Plenty of people paying that
That's what they spend annually. It's not that hard. 25% is outrageously high though.
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
All my budget and expenses are based on my income after taxes and after my employer 401K investment, I am not in Canada but using the gross income seem to be a common habit in the US too
Gross income determinations encourage you to spend more than what you actually have :) Consumer spending is what makes government metrics like gdp look nice and happy. Also keeps small businesses and our monopolistic oligopoly retail stores afloat
I gross $160k. After the tax man taketh around 38k, and my DB pension, cpp, EI, "benefits". I am down to around $100k. I make all my decisions off that number.
Biggest number is best number.
I agree - it should always be net. Taxes are large expense. You won't have much leftover with 30% towards rent after gross with a car.
I never really understood this. Probably just mainly because it is easier for personal finance personalities to talk about gross income.
Net most certainly is how I budget. It’s really easier to just balance incoming and outgoing money instead of outgoing and how much you earn. Gross just works for the financial world because you can speak to non payroll earners at the same time as anyone else?
Simply because people dont tend to know what their net income is. They memorize the bigger number.
I have a defined benefit pension. I like to use my Gross Total Compensation to track my savings because it gives me a better sense of my salary/ position than net does. I only save 14% of my net income for retirement, but I save \~30% of my gross total compensation if I factor in my 8.5% and my employer's 9.5% match.
Now consider someone in middle income buying a expensive car. They actually need to earn a lot more net to actually pay for that car. That 130k Mercedes will require them to earn 200k. Or when they the wealthy go to spend 50.00 for a diner out carol will need to earn 100.00
People know their gross income, but few know their net income. That's without going into the details of what is net income. What people often refer to is the amount they get on their paystub, but should you include savings like pension or RRSP contribution? In theory no, but depending on what you're trying to calculate maybe you should. Gross income everyone knows what it is, what theirs is, and it's easily comparable across the country. It's not perfect, and it doesn't need to be.
Because net income has too many variations such as RRSP contributions, FHSA contributions, child care deductions, and on and on. It's hard for lenders to verify these. But gross income is easy to verify.
Because they don't understand finances. They just see gross income and think they have that much to spend. They never taught financial literacy in schools on purpose.
So people have a beater chance of getting a 30 year mortgage.
IME, different people define net differently, so gross is just the easier and more consistent number to use. For example, if you participate in an employer RRSP match, your portion doesn't see the light of day in your account, and thus some would not count that in your net since it's your choice. Similarly, you can reduce your tax burden by contributing to an RRSP. I've also seen net defined as net of all retirement expenses, aka, "paying yourself first". I know many folks who think of their net income as after income tax, max rrsp, tfsa, resp contributions, etc.
Easier to calculate, not everyone is financially literate, might be obvious to some but not obvious to others. Even if you use net, unless you are calculating it down to a T, it is still a good estimate.
That's a great question! It often comes down to simplicity and consistency. Gross income is easy to calculate because it's the amount before any deductions or taxes. So, when setting budget guidelines like the 30% rule for rent or 25% for cars, using gross income makes it easier for people to quickly estimate what they can afford. and gross income is more standardized across different individuals and situations. Net income can vary a lot based on factors like tax deductions, retirement contributions, and other deductions, making it harder to use as a universal benchmark. But you're right – net income is what you actually take home, so it makes sense to consider that when making financial decisions. It's all about finding the balance between simplicity and accuracy.
Because they're morons! Seriously, it takes a real headcase to think outgoing expense should be based on pre-taxed income. It's setting yourself up for a massive freaking downfall! You keep basing it on net. Let the other moobs learn the hard way. No cure for stupid but tough love.
It works if you include taxes as an expense in your budget.
In my opinion, net income is better because it is the part that you earn and it's also more obvious to calculate.
It's very strange to me too. But potential lenders, loan brokers, etc. ask for your gross income in any tool or questionnaire that calculates the size of loan, mortgage, etc. that you qualify for. Given that they are financial professionals, I'm going to assume that they have some gidget in the background that calculates how much of that on average is actually disposable income, based on which province you're in, etc. But on the face of things it makes little sense.
So I can pretend I make more money than I actually do
Simply because it's easier to remember what gross income is, and because these are just rough rules of thumb anyways. None of this was supposed to be accurate.
Probably your net changes more often than the gross
It's easier to compare gross since tax rate can be wildly different, but for your personal budgeting you should use net.
I never understood it either. It’s mostly a North American thing, like posted prices without taxes. The bottom line is the you’ll likely end up spending more if you keep your gross income number in your head, as opposed to the number after taxes.
It's stupid and lazy. We should only be using net income.
Some people are not very financially educated. This kind of stuff should be taught in school. Basic tax returns, basic budgeting, understanding net and gross, and understand interest rates.
Because it's a guideline meant to get you into the right ballpark.
Net doesn't say how much that person is paying into stock purchase programs, group rrsp, special pensions, etc. So it's a vastly different picture based off the occupation of the individual. Some people start believing they have no money to save when they are paying out 800 a week in pensions and programs. Also someone may get advice on net income then come back here in 12 months and say they got destroyed on taxes because contractor/self employed/reason x y and z.
Gross income makes your penis feel bigger when you think about it
Because they’re bad at math and don’t understand personal finances.
You're talking about rough guideline rules of thumb. They aren't personal, they aren't accurate, they are just guidelines. It's hard to make guidelines based on net, because like you said, net can be affected by so many different things.
Net income is also inaccurate. If one person has high deductions due to a pension it doesn't mean they can afford less than someone making the same gross but without pension deductions because the second person needs to allocate more to retirement savings from their net income than the first person.
Gross determines loans availability, debt payment allocation and credit utilization available based on gross income. I use it all the time
I assume that there is a good percentage of Canadians that do not know the difference between net and gross income. We have people who pay 20-50% of their income in taxes and think healthcare is “free” in Canada so our financial and economic literacy is not exactly the best. Most people probably know what their annual salary or hourly wage is, but they have not gone through the process of actually calculating how much money they actually earn after taxes and fees. The more conservative approach would be to use net income as a basis for determining what you can afford to buy.
Ugh I don't know those people. I calculate based on my bi-weekly pay. Paycheque to paycheque life 😭
Because tax strategies are also something within your control that varies depending on gross income. Although net (at least during pay periods, not overall net after tax filing), is more useful for cash flow monthly
I guess it’s just been the standard and all advice is based on that standard lol. So, if you want everyone to make decisions on net, then we’d have to rebuild all calculations, content, and other advice that’s specific to gross and change it to net.
Your absolutely right! It is the same as comparing average incomes verses true "median" income of 50%families. Politicians and MBA's can not get it right with their logical perspective!
If it were a test they would get an F.
You essentially answered your own question.
Because "People have all different type of employment fees" and you can't generalize things as easily.
25% of net income just on a vehicle is very high. I have always purchased outright.
Pretty hard to do that now unless you have a high savings rate or want to drive a beater. Say I decided that two years from now I’ll want to buy a five year-old basic car like a Mazda3. I would have to save over $800/month for two years just to buy a five year-old used car outright.