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Reader Ali Asghar-Ali from Houston asks: 

When people talk about savings and expenditures, like “save 20% of your income” or “spend no more than 30% of your income on rent/mortgage,” are they referring to your net or gross income? 

When you’re deciding which apartment you should rent, some experts advise using your pre-tax, or gross income as a baseline.  

“It’s just much simpler to use gross income in any kind of calculation because it’s a stable number,” said Vanessa Perry, interim dean at the George Washington University School of Business.

Using take-home pay can complicate your budgeting plans because everyone’s tax obligation is different and subject to change, Perry said. But while gross income is a great starting point, experts say you can adjust your budget to your take-home pay depending on your goals and any major life changes you experience.

“People need to realize that these are rules of thumb. They are not intended to be precise,” Perry said. 

If you’re about to have a baby, for example, your tax bill may drop because you’re adding a dependent to your household, Perry said. “You may actually have a bit more flexibility than is captured in one of these rules of thumb,” Perry said. 

But when that child grows up and moves out, you lose your dependent, which could lead to a higher tax bill, Perry said. 

There are some budgeting models, like the 50-30-20 rule, that do recommend using take-home pay. This plan suggests allocating 50% of your income toward your needs, like shelter, transportation and insurance. That leaves 30% for wants, like vacations and clothing, and 20% for savings and/or debt. 

Some experts say that 20% should go toward savings even if you’ve already contributed to your 401(k) or similar retirement account, like WealthBuild CEO Ramona Ortega.

If you can, Ortega recommends setting aside 20% of your after-tax income for emergency savings and investment vehicles like a Roth individual retirement account. Unlike a traditional IRA or 401(k), a Roth allows you to invest post-tax dollars and withdraw your earnings tax-free after age 59.5 (provided you’ve had the account five years). 

“Money has to actually be put to work so that you’re beating inflation and you’re beating the value of the dollar,” Ortega said. 

These investments have historically beat inflation in the long run, even when the stock market gets volatile. Recent market turmoil has dinged retirement accounts in the short-term, but there are always fluctuations in your 401(k). Most people just don’t look at it, Ortega said. 

“Investing in the market is still the most viable option for a return on your dollar,” Ortega said. 

These rules don’t make sense for everyone’s personal finance goals, and you may decide to deviate from the recommended amount. 

Many Americans are struggling to limit the portion of their income that goes toward housing. Conventional wisdom often says 30% of gross income is a good target. More than 21 million renters spent more than that in 2023, according to the U.S. Census Bureau.

If Americans are spending more of their paycheck on housing, there’s little headroom for unexpected expenses, said personal finance expert Zina Kumok. Your water heater could break down, or you might live in a hurricane-prone area and need repairs, she said. 

That 30% target can also adjust down in an area with a lower cost of living. Don’t feel pressured to spend more in that case — instead you could earmark extra funds for other major expenses, like child care, Kumok said.

So these budget guidelines are just that. But  they can be useful to create “habits or systems that make it less overwhelming,” Ortega said. 

Whichever rules you use, Kumok said you may have to revise your budget as you better understand  your spending habits.

Many people end up “disappointed and disillusioned” if they’re not meeting unrealistic goals they’ve set for themselves, Kumok said. 

“So what I say is, ideally, look at the past three months of spending. Get that average for each basic category, and then build your budget around that,” Kumok said.

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