Why Your Finances Are Gross

by A Blinkin on October 30, 2012

It’s not surprising to anyone that Americans are TERRIBLE at managing their money. A quick look at some Staggering Financial Statistics will solidify the claim. I could list 1,000 reasons WHY everyone’s finances are “gross,” but today I’ll only present one.

Decisions, Decisions

Think about 5 biggest decisions you have made in your life. Since our minds become easily overwhelmed, I’m sure you’re struggling with this request.

Let me help…

Depending on your age, I would bet that 3 of the biggest decisions you have made may have involved:

  1. Purchasing a car
  2. Purchasing a house
  3. Securing a job offer

Obviously, you have likely faced more monumental decisions than the above, but I would assume that most of my readers have experienced at least one or two bullet points.

Why Your Finances Are Gross

Think back to when I presented The Ideal Budget for a Single Guy. In that article you will notice that an income of $60,000 typically leaves you with $3,000/month rather than $5,000/month. A difference of $2,000 would make a BIG difference to nearly any budget.

Now revert back to the above 3 decisions…

In all 3 scenarios, we are anchored down by our GROSS income.

  1. When purchasing a car, the dealership will use your GROSS income in order to determine which car you can “afford.”
  2. When purchasing a home, the bank will use your GROSS income in order to determine how much house you can “afford.”
  3. When securing a job offer, we become so focused on the highest figure we are offered rather than considering how much we’ll actually take home.

Thus, in 3 of THE BIGGEST DECISIONS WE MAKE, our minds are focused on an inflated figure.

 

Tagged as: budgeting, gross income

  • http://twitter.com/AverageJoeMoney Average Joe

    Ha! Funny analogy. I wasn’t sure where you were going at first….just thought we were discussing single guy dirty laundry….. You’re right on (as usual). If you click your heels together and say “there’s no place like money” you can start using those numbers car dealers pull from.

    • Funancials

      haha- to be honest, I wasn’t sure where I was going either.

      My favorite concept is underwriting a loan for someone that receives Social Security. Most lenders will GROSS UP SSI. So, for some reason, let’s multiply your ACTUAL income by 125% and BOOM – that’s the number we’ll use! That makes sense, right?

  • http://twitter.com/ForHerByHer For Her By Her

    This is so fitting for me right now! You’re absolutely right, the gross income is what’s used for almost everything. Today however, I met with my bank for a business loan and they used my NET! Obviously it made a difference on the amount they were willing to loan.

    • Funancials

      Probably a HUGE difference (especially if you’re self-employed). What sort of business loan were you applying for?

  • http://www.dqydj.net/ PK

    “3 of the biggest decisions you have made” – For me, substitute college for the car. We own both of our cars, fwiw.

    And I don’t recall now, but I think the FAFSA is based on gross salary as well (although colleges have some freedom to change their own personal formulas.). Good piece!

    • Funancials

      Great job having both cars paid off. Personal question, how much are your cars worth? I’m curious if you stuck to any of my buying tips?

      I didn’t realize FAFSA went by gross income as well. Can you think of a “good” reason as to why everyone goes off of gross?

      • http://www.dqydj.net/ PK

        I don’t know – my Saab I consider worthless since the parent company went bankrupt (I’ll keep if for a while – the parts contract goes for ten years). The wife drives a 2010 Jeep Liberty and it’s in great condition still.

  • http://www.debtsntaxes.com/ DebtsnTaxes

    Haha, I thought you were going in a completely different direction with this post. I think it’s kind of stupid to go with your gross income for both you and for the lender. Not only are they giving you a false sense of how much money you will be able to afford but they are also taking on more risk themselves. Sounds like a lose-lose situation to me. That being said, the individual taking out the loan is the one that should have the final responsibility for knowing how much they can afford because they are the only ones that care. Banks are going to tell you the maximum amount they can lend you because it makes them the most money. Especially when it comes to home mortgages that are guaranteed by the Gov.

    • Funancials

      I would love to know how they came up with this “lending standard.” As you pointed out, it isn’t helpful to borrower OR to the lender….unless it’s 2002-2006 and ANYONE can buy a home AND the price of houses are forever increasing.

  • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

    That is why I bought a home for well below what I could have been approved for. I still enjoy it and my mortgage is ridiculously small compared to most. Gives us a lot of extra room in our budget, which is definitely not based on gross income :)

    • Funancials

      To what would you credit your restraint? Did you parents teach you the basics of budgeting or have you seen the screw-ups of others?

      • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

        I read a lot of PF blogs in college. That and I got a killer deal near the beach that I couldn’t pass up. The mortgage part of my payment was less than my car payment (granted my mortgage is being paid for 10 times as long as my car loan was…)

  • http://twitter.com/bitfs BFS

    Good point! I try to think in terms of net but it is difficult when those big numbers clog up my head, lol.

    • Funancials

      haha…banks have gotten better (possibly in an unfair way) of looking at self-employed income. 100,000 gross sales may only lead to 12,000 net income. No loan approval there.

  • maria@moneyprinciple

    Clever twist and a very good point. Another decision that is affected by the gross/net awareness is pay increases – one may sound very attractive but in fact increase your net income by very little (particualrly if you cross a tax belt). Thanks for making me think!

    • Funancials

      I didn’t even think about that. A small raise into a higher tax bracket could potentially make the raise invisible.

  • Little House

    Very accurate. It really doesn’t make sense that the big decisions we make are based on our gross income when really all we have to work with is the net. A savvy, smart consumer would do the math themselves (well, that’s if they have decent math skills to work with.)

    • Funancials

      Let’s be honest…how many savvy, smart consumers have you seen? Only PF bloggers are savvy.

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  • http://twitter.com/eemusings eemusings

    Huh. Interesting point.

    I don’t have a mortgage but I’d like to think banks take into account your expenses as well as income!

    In accepting my current job I worked off my previous take home pay to calculate what gross amount I’d be willing to accept.

    • Funancials

      They definitely account for you expenses BUT only certain expenses. They really only count liabilities which show on the credit report + taxes/insurance on your home. Cell phone, insurance, etc. don’t go into the Debt-to-Income calculation. Even though one borrower could pay monthly car insurance and cell phone bill of $400 vs. another borrower only paying $100.

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