Gross Indulgence
Posted by John Draper | Filed under Bad Habits!, Budgets, Economics 101
People are always asking me about what they should be spending in various areas of their budget. I don’t like giving specific answers because there are so many variables: where you live, your priorities, your income.
Speaking of which, I know I’ve said this before but I’m going to shout it this time: YOUR GROSS INCOME IS NOT YOUR IINCOME. Your gross income is yours and the government’s income. If you want a budget that works, you have to work with your NET income.
If you gross $60,000 a year – the average Canadian FAMILY earned just over $66,000 in 2007 — you don’t have $5,000 a month to spend because:
- If you live in B.C. you have to give $12,455 to the government
- If you live in Alberta you have to give $13,491 to the government
- If you live in Saskatchewan you have to give $15,141 to the government
- If you live in Manitoba you have to give $15,317 to the government
- If you live in Ontario you have to give $12,957 to the government
- If you live in Quebec you have to give $16,518 to the government
- If you live in New Brunswick you have to give $15,679 to the government
- If you live in Nova Scotia you have to give $15,590 to the government
- If you live in P.E.I. you have to give $15,353 to the government
- If you live in Newfoundland you have to give $15,189 to the government
- If you live in N.W.T. you have to give $12,568 to the government
- If you live in the Yukon you have to give $13,240 to the government
- If you live in Nunavut you have to give $11,717 to the government.
(BTW: According to the book Tax Facts 15, income taxes account for only 34.7% of the taxes the average Canadian family paid in 2007. Ouch!
Okay, let’s take Manitoba as our example. Instead of $5,000 a month, AFTER TAXES your NET income – would be $3,723.58. Hey, wait a minute. That’s not your TAKE HOME PAY. If you have deductions your TAKE HOME PAY WOULD BE LESS. You might have to pay employment insurance, CPP/QPP, or other deductions. And if you get company benefits – health benefits, for example – that are taxable, they’re going to take even more tax off your cheque.
Let’s face it, if you earn $60,000, you can’t just divide by 12 and think that’s your income. And if you’re basing your budget – and more importantly, your thinking – on your GROSS income, it’s no wonder you’re going deeper and deeper into debt each year.
So, if you make $60,000 a year and bring home $3,600 a month after deductions, how much should you spend on housing. According to the Gail Pie – and this is only a guide, people, it’s not written in stone – you should spend no more than 35% of your income on rent/mortgage payments, taxes/condo fees, heat, electricity and maintenance. That tops you out at about $1,260 a month.
Does $1,260 seem like a lot or a little to you? With rents and house prices eating a larger and larger portion of our income, we’re becoming numb to the impact on our ability to spend, which ultimately pushes us to use our credit.
According to the Canadian Real Estate Association, the average house price in June this year in Canada was $341,100.
Assuming you put down just 5% as a down payment and amortized for 25 years at 5.5% your monthly mortgage payment would be $1977.94. So you couldn’t afford the average house. Let’s say you got into the market a while ago, and had a $200,000 mortgage, your monthly payment would be $1220.78, which would leave a whopping $40 to cover your taxes, heat, electricity and maintenance. Hmmmm.
But wait, Gail, you said that the percentage wasn’t written in stone.
It’s not. If you can find a way to get to work without spending 15% of your budget on transportation – which would be $540 a month – you could lump the rest into your housing budget. Or if you had no debt, you could lump that 15% into your housing budget, or your transportation budget, or your LIFE budget.
Most of us aren’t don’t or can’t hoof it to work every day, so we have a car and with it a car payment, insurance, maintenance and fuel costs. According to the Stats Man, the average Canadian household spent $9240 a year – or $770 a month – on transportation. But this was back in 2006 (the last year for which he has numbers) before gas was over a buck a litre, so we’re spending a tad more now, me’thinks.
It’s getting harder and harder to make ends meet, while having at least some of the things we WANT. There’s a better TV, a better cell phone, a better digital camera. How about a holiday down south, or a trip to Europe, or a boondoggle to Vegas? And since the styles of clothes, shoes, handbags keep changing, we have to buy at least a couple of new things each season just to stay current, especially if we have a visible job. And those darned kids just keep growing! Never mind what we have to put out for skating lessons, piano lessons, hockey equipment… the list is endless.
Retailers know how to help us part with our money. But they’re always looking for new ways. According to a Cornell University team, if restaurants use a numerical price format without the accompanying “$” symbol, diners spend more on a meal. I guess without the dollar sign there as a reminder that we’re spending MONEY, we forget. Really?
Okay, so you’re not as rich as you think. Your housing costs are eating a bigger part of your budget. Transportation costs are soaring. Demands on our pockets keep growing and retailers are coming up with new and improved ways of parting us from our hard earned moolah. What’s a person to do
Back to basics boys and girls:
Make a budget. You’ve got to WRITE IT DOWN. And I don’t mean in a notebook, or on a post-it note. I mean on a BUDGET WORKSHEET. Start by looking at your June bank statement and using only the income you put in the bank. Never mind that some months you earn commission, or your partner does an extra job and brings home a little more, or your deductions fall because you’re close to the end of the year and you’re all paid up. If you have a fluctuating income, then you’ll have to build a two-tiered budget: one for the basics when the well is dry, and one for the extras when the money is flowing.
Get rid of your debt. If you have no debt, you have more money to do the things you want to with your family. If you have debt, get it paid off. It doesn’t matter what you have to give up or how much harder you have to work, GET OUT OF DEBT. Once you’ve figured out your budget, if the amount allocated to debt repayment means it’ll take more than three years to be debt free, you MUST find a way to increase your debt repayment amounts.
Dump the expenses that you think you HAVE to have, but aren’t related to keeping body and soul together. Once upon a time there were no cell phones and we didn’t die. Once upon a time there was no cable and we didn’t die. Prepared meals didn’t exist. Coffee was something we brewed at home. Eating out was for special occasions. Nails were something we grew and food never had the word “junk” in front of it.
Now we spend money on energy drinks, buy sixty-two versions of cleaning products (whatever happened to a mop and bucket?) and wouldn’t dream of NOT buying our lottery tickets because if our numbers came up we’d be mad as heck! We throw huge weddings, going thousands into debt for ONE NIGHT of fun and frolic. We throw ridiculous birthday parties for our kids, inviting whole classes so no one will be offended. We spend buckets of money to try and not look old, lose weight, be healthy. (It’s not fooling anyone but you. Sorry.) And we believe that if the deal is good enough, it justifies spending money we haven’t yet earned.
If you want a life that’s not riddled with stress, you’ve got to know where you’re going and how you’re going to get there. It doesn’t mean throwing wads at the wall and hoping something sticks. If you don’t have a written budget that you’re following like the gospel, then you’re a Wad Thrower and you’re doomed. ‘Course you won’t have to wait to die to go to hell; you’re there now!
August 25, 2008 at 10:55 am
Thanks to you Gail, you got me paranoid about the economy.
Funny how the media makes it seem everything is all hunky-dory, but in reality, people are way too close to the edge…and your show displays just how easy it is to get into a debt hole. Unrealistic housing prices and soaring transport costs (translates into higher food costs) are bleeding people and sadly I wonder if people actually realize that. With debt levels at an all-time high, and savings at a low, you got to wonder when it’s all going to fall through. On one hand, I’m hoping for a massive market correction because housing prices, regardless of which market you look at, are at levels obscene to the average household, but unfortunately, if this were to happen, t will come at the hardship of many “undisciplined” people which on the other hand is something I wouldn’t want to see. As the ever-famous quote goes “oh the humanity!”.
Living in Winnipeg, MB, all I have to say to the stats info you provided is “what the ****?!?”. How is it that Winnipeg, a blue collar town, is getting jacked with one of the highest amount of taxes?? As you always say Gail “whasss up with dat?” No wonder the younger people are flocking to BC, Ontario and Alberta…
August 25, 2008 at 11:51 am
BC may have lower taxes, but we pay through the nose for everything else. Erran, you complained about housing. Check out the MLS numbers for the Greater Vancouver area. Rents are expensive too. Then there is food. Gas fluctuates 1.38 to 1.45 litre. I removed the $ to make it seem less expensive.
August 25, 2008 at 12:37 pm
So in conclusion I will never be able to afford a house unless a relative drops dead and leaves me a pile of cash. I don’t even see the point of trying to save up for a house, honestly – I’ve already figured out that I’d have to save up for a 10% downpayment for about 10 years on your “average” house. So why bother? I’ll just rent and contribute more to my RRSP instead – and I get the added bonus of not having to worry about home repairs.
August 25, 2008 at 1:04 pm
Diana, I’ve considered moving there not too long ago, so definitely familiar with the prices in real estate/rent. But at least the cost is attributed to commercial market demand (well, except the new gas tax)…but why is the Manitoba sucking as dry?? Between the two, I’d rather live in BC…much nicer even at the higher cost of living.
August 25, 2008 at 1:33 pm
Hmm, had a good chuckle with Gail’s post today – she says “you’re not as rich as you think” – Scotiabank tells us “You’re richer than you think” – hmm, who do we believe – DAH, Gail!
Rebecca, I have been thinking a lot like you lately regarding housing. But I’m reaching mid-life and now pondering the whole retirement thing – generally, a well maintained house could carry for less per month than renting, and I don’t think I want ongoing condo fees for life either – and when it comes to fixed income retirement living, I think I would want the house and if I needed more cash, I have the asset to sell. At least, those are today’s thoughts. Either way, I’m saving my cash for down payment or retirement – can’t wait for the tax free savings accounts!
August 25, 2008 at 2:23 pm
I recently purchased a house and was absolutely amazed regarding how much money I could qualify for. I then asked my lender to basically reverse engineed from a total monthly payment including taxes, insurance, principle and interest to a dollar amount to see what I could really afford. It absolutely blows my mind what the mortgage payment would have been if I borrowed the maximum. The whole thing is stressful since there is absolutely no way to predict all of the costs ahead of time. As a result it is really best to leave some wiggle room in the budget. Also if you are purchasing a home that isn’t new there are unforseen repair costs. So even down south of Canada where the real estate market is falling apart the banks are still approving mortgages that home owners can’t realistically afford. Where I live it seams like every other house is either bank owned, short sale or a forclosure sale. I feel like most people still feel that if the bank will approve them for the money they must be able to afford the mortgage.
August 25, 2008 at 3:56 pm
What a great post! Definitely motivating and really hits home. Sometimes it’s really easy to forget what our goals are and get lost in the picture that society paints for us.
I was surprised to see BC has the lowest tax amount! But let me tell you, housing costs in our area are outrageous! I bought a 1 bedroom apartment in greater Vancouver last October, because that was ALL i was willing to pay for. BC is beautiful, but i don’t think it’s worth being in debt for the rest of my life, to view mountains that i will never climb :p When it’s time to get a bigger place, due to family growth – moving out of BC will be the first thing to do.
Thanks for the motivation Gail
August 25, 2008 at 6:49 pm
It’s deceiving that Manitoba has the highest tax rate because it’s consistently has one of the lowest costs-of-living across Canada. My husband used to work at the bank and grad students would tell him they choose to study here because it’s too expensive everywhere else! It’s just too bad housing prices shot up when they did a few years ago. I’m sure the last person that owned our house must have bought it for a third of the price we paid.
August 25, 2008 at 7:44 pm
Mike, like you I really want the security that home ownership provides, especially in retirement – but at what cost? When my parents were around my age, approximately 1972 if I average out their ages, the average cost of a new home was $27,550 and the median income was $9,697 (these are US numbers because Canadian ones for ‘72 hard to find). So a house was worth about 2.5x gross income.
Now the average house price is $341,100 according to Gail. Median household income in 2005 was $53,634. That’s over 6x gross income for a house – i.e. the average family would have to sock away 10% of their GROSS incomes for over 6 years for a 10% downpayment (assuming their money is in investment vehicles that keep up with the increase in house prices over that period of time!)
Depressing, isn’t it? I suppose I’ll just keep popping cash into my RRSP every month, and if I REALLY want a house later down life’s road, I’ll withdraw my downpayment from there. At the moment I’m really leery, though – how can house prices possibly sustain themselves when the baby boomers retire and downsize, anyway? My generation won’t be able to afford to buy their houses at today’s prices.
Melissa, the BC housing market makes me cringe too! I used to live in BC and was pondering moving back there for a while, but what I’m paying in downtown Toronto for a large one-bedroom apartment would only get me a bachelor suite in someone’s basement in Vancouver, if I were even lucky enough to find one available.
August 26, 2008 at 12:40 am
Seriously Erran, you cannot compare tax rates between provinces because it’s like comparing apples and oranges. Each province has their own economic and revenue pros and cons. Alberta has low taxes and no PST but they also have tons of oil money and their residents pay for health care. You seem to like comparing us to BC but I’ve heard more than once that BC stands for “Bring Cash”. A $200,000 house in Winnipeg is worth $500,000 in Vancouver (FYI, salaries are not 3 times more in Vancouver than what they are in Winnipeg. You also have to consider that BC has 4 times the population of Manitoba – a larger population means a larger tax base. Not to mention that BC is the Pacific port for all of Canada.
So, if you want to save a few hundred dollars a year in taxes but have to spend a few thousand more to maintain the same lifestyle in BC that you have in Winnipeg that sounds to me like a ridiculous financial decision. That’s like saying you can save 50 cents buying milk at the store across town but you spend $5 in gas to drive there and back. Duh.
August 26, 2008 at 7:13 pm
So the average family income can’t qualify for an average priced home? That really proves that we are getting in over our heads on average, doesn’t it!
July 21, 2010 at 12:41 pm
I was looking out for information about this on Google and stumbled on your piece. I found it to be well explained. Thanks