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Gross income is as good a number as any (for many purposes).
Most of these purposes however are about how far a lender will let you extend yourself.
If you know to not go along with them... then gross is as good as any other.
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And besides, most people don't really know their after tax income.
Are really suggesting that people shouldn't know their net numbers?
Of course not. Dig in. Know.
Make choices based on what's best for you. Not the lender.
This might be in the wrong place but, why come tax season and when we’re buying a car, renting a apt/house.
Why do these people look at our gross income and not what we bring home?
I’ve never understood this.
To qualify, there is a certain maximum percentage of your income they will allow to go toward your car payment/rent/mortgage/whatever. This percentage is usually around 30% for housing and may be lower for car payments. This should leave enough room for your taxes and other expenses.
Of course as a consumer, you should do your diligence and work out a complete monthly budget.....the only way to know for sure what you can REALLY "afford".
This might be in the wrong place but, why come tax season and when we’re buying a car, renting a apt/house.
Why do these people look at our gross income and not what we bring home?
I’ve never understood this.
It is very simple....GROSS is the only way to keep things apples to apples. Gross is Gross, whereas there are all kinds of different variables to NET.
It's not like a lender takes the Gross number and lends up to that number. Let's take a mortgage qualifying for example. The maximum debt to income ratio allowed is typically 45% of GROSS. That means the new house payment plus all other monthly obligations cannot surpass 45% of someone's GROSS income. The other 55% of someone's gross can therefore be allotted to taxes, utilities, savings and all other expenses. Lenders use formulas. It is up to you, the borrowers, to look at your net and what you can "afford".
The gross is used for fairness. Picture 2 wage-earners: one has 2 ex-wives and is paying child-support for a child with each ex-wife, and has had his wages garnished because his did not pay some type of bill. Wage-earner #2 makes exactly the same wage, but has has no deductions except the usual - health insurance, 401K, etc.
Would it be fair to wage earner #2 [who earns the same exact income] if the wage earner #1 does not pay taxes on the same amount?
No matter what number you use, there is always going to be a wrinkle. Gross income is as good a number as any. And besides, most people don't really know their after tax income.
Huh? I know my after tax income a lot better than my gross. It's exactly what hits my bank account. In fact I don't really know my gross at all until the end of the year when you get your W2's.
Huh? I know my after tax income a lot better than my gross. It's exactly what hits my bank account. In fact I don't really know my gross at all until the end of the year when you get your W2's.
GROSS is a lot easier than you think.
If you earn $15hr, then GROSS is calculated @ $15x40hrs for a week's pay.
(of course only you know if you constantly leave early and only earn 28hrs per week of pay...)
If you earn salary, then GROSS is your annual salary (so you know exactly what will be on your W-2).
With various changes in tax rates, it's difficult to forecast what your NET might be months or weeks from now. But you'll have a better guess at your GROSS.
Not everyone cashes a paycheck or looks at their bank deposits. Usually, they look at some type of paystub that details GROSS pay with authorized deductions, etc.... and finally some NET number that will goto A bank or multiple banks.
If you earn $15hr, then GROSS is calculated @ $15x40hrs for a week's pay.
(of course only you know if you constantly leave early and only earn 28hrs per week of pay...)
If you earn salary, then GROSS is your annual salary (so you know exactly what will be on your W-2).
With various changes in tax rates, it's difficult to forecast what your NET might be months or weeks from now. But you'll have a better guess at your GROSS.
Not everyone cashes a paycheck or looks at their bank deposits. Usually, they look at some type of paystub that details GROSS pay with authorized deductions, etc.... and finally some NET number that will goto A bank or multiple banks.
Not everyone cashes their check or looks at their bank account? I would put the two combined at at least 95%+ for W2 employees. You either cash your check or it gets deposited for you, if you are a W2 employee, there really is no other way to receive the money in a legit way, and who doesn't look at their bank account?
I really have no clue what my gross will be this year.
One problem with looking at net on someone's paystub is that many people don't perfectly withhold for taxes. Most of the country gets a refund (around $3,200), which means they sometimes have thousands of dollars available to them that doesn't show up by calculating net pay by number of pay periods. Other people under withhold and will need to come up with thousands of dollars that appears in their net pay to pay those taxes.
So money going into your retirement savings is not part of your net?
How about money going into your kids 529 plan, your health savings account etc?
It's part of your net, but it's something you can manage since you could indeed drastically alter the delta between gross and net but stopping contributions to 401k, 529, HSA. Obviously it's preferable to contribute as much as possible but at the same time it makes sense to understand how much of the money you lose from gross to net could be recovered if needed.
I remember when my wife and I reached a stage where we could survive on either one of our incomes. We'd have needed to stop retirement account contributions from remaining salary to cover our expenses, but it was still a nice milestone knowing we had that level of financial security where most of the belt tightening would just be cutting off retirement savings until the other one found a new job. How much of gross vs. net was manageable mattered.
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