At some point in my adult life, I learned this rule of thumb:
The monthly cost of housing (that is, rent or mortgage) should comprise less than 30% of your income.
It’s a kind of personal finance benchmark: if you’re spending too much on housing, you’re probably not living an economically-sustainable lifestyle. For example, I recently read that, on average, Montrealers “spent 18.6 per cent of its income on housing and shelter costs in 2006”. On an unrelated note, the median cost of housing in the Montreal area seems shockingly low at $683 a month.
However, I’ve never been clear as to whether they meant 30% of your gross or your net income. I decided to finally figure it out, and write up the answer.
Household income is a measure of current private income commonly used by the United States government and private institutions. To measure the income of a household, the pre-tax money receipts of all residents over the age of 15 over a single year are combined. Most of these receipts are in the form of wages and salaries (before withholding and other taxes), but many other forms of income, such as unemployment insurance, disability, child support, etc., are included as well.
So the key phrase there is ‘pre-tax money’. Apparently, then, the rule of thumb applies to your gross income. Does that jibe with what you thought?