Personal Finance 101 - Your Salary Is Not Accurate: The 2/3 Rule of Thumb

Personal Finance 101 - Your Salary Is Not Accurate: The 2/3 Rule of Thumb


2 min read

If you are entering employment or making income from a business, one thing you should keep in mind is that your salary is not what you take home. NEVER do calculations based off your salary.

For example, someone with a $50k/yr salary will not make $1 million in 20 years. Taking a job with a pay increase of $10k/yr is not a pay increase of $10k/yr.

If you're an employee, your paycheck will already account for an estimated reduction due to federal income tax, payroll tax, state and local tax, health insurance, health savings account (HSA) contributions, other insurance, and 401(k) contributions. Side note: I personally only contribute up to the company match, but that's another story.

If you're making income through entrepreneurship, taxes will be much more visceral, when you fill out your 1099 form and have to give up a huge chunk of your income.

The 2/3 Rule of Thumb

When doing "back of the envelope" calculations, always use the 2/3 rule of thumb. If you make $30k per year, assume you will really only see $30k * 2/3 = $20k of that. If you're making $100k per year, you're really making $66.7k.

Keep this in mind when calculating expenses too. For example, if you're going to be paying $1000/month in rent, that's $12k per year, and multiplying $12k * 3/2 = $18k. This means if you're living with your parents and want to move to this apartment, you have to earn $18k more to get back to the same salary.

In conclusion, don't be a fool.