When you look at your monthly pay stub, remember to take your income after tax withholding as your starting point. Your housing expenses will come from your post tax money, so that’s where you should start. For example, assume you make $120,000 a year paid bi-weekly, then your total monthly salary is $10,000. Let’s say your tax withholding is set at 28%, so you only get $7,200 post tax withholding every month. For simplicity, we’ll ignore the fact that you might get a tax refund (or owe additional taxes) on April 15th the following year.
Of this hypothetical $7,200, you’ll likely also have to deduct your health insurance premiums, as well as any contributions to your 401K plan. Say you contribute 5% of your pre-tax income to your 401K every month because that’s what your employer will match. After that $500 401K contribution, you’re left with $6,700 in post tax income.
Even though the burden of health insurance premiums have started shifting more to workers vs employers in recent years, for the sake of simplicity let’s assume your monthly insurance premiums are $200. That means you’re now left with $6,500 post tax income every month.
Now assuming you’re very frugal and try to eat at home as much as possible, you’ll still have to factor in $500 for groceries every month. Assuming you’re not saving anything additional, not taking any fun trips and not eating out or buying expensive drinks at bars and restaurants, you’ll have $6,000 left to budget for housing expenses.