5 ms·

Where does 3X salary rule come from?

consp 4y ago
It used to be that the average monthly payment on housing would go up to around 25% of your spendable income, at least that was what the government used as a guideline. These days you need over 40% to even get anywhere and even that is unlikely to be enough. I've also noted around here the required income went from about 3-3.5 to around 5 times the rent rate despite that meaning you need a 6+ figure income for even the most basic apartments (which is rare here) which is just risk reduction for the owner.
Layke1123 4y ago
Early America when homes were steady at about that price.
- orthoxerox 4y ago
  In early America you just built your log cabin with an axe and an adze.
  - xcambar 4y ago
    In early America, you pillaged and ransacked.
    - TecoAndJix 4y ago
      In early America, you string up with your fellow ammino acids in the primordial soup
      - xcambar 4y ago
        You won't get me to call Pangaea "early America". So typical of American imperialism. Only second to the Brits. ;)
- user_named 4y ago
  Pre-zirp. Monthly housing cost should not exceed a third of take home.
xcambar 4y ago
It's a rule of thumb that your total debt should not exceed 1/3 of your income. It has no economic foundations whatsoever. Yet, banking institutions use(d?) this rule to reject whatever application they were not comfortable with.
- missedthecue 4y ago
  I've never heard total debt should be 1/3 of income. Having a mortgage completely blows that up. Nevermind student loans, a car, or getting a credit card. I've heard that monthly housing shouldn't be more than 1/3 monthly take home. Is that what you're thinking?
  - eru 4y ago
    > I've never heard total debt should be 1/3 of income. Having a mortgage completely blows that up. Nevermind student loans, a car, or getting a credit card. Or investing on margin.
- EnKopVand 4y ago
  > It's a rule of thumb that your total debt should not exceed 1/3 of your income. Unless tax deductions work very different in the US than they do in Denmark, that is pretty bad advice. Here, sitting on a 60% mortgage loan that is many times higher than your annual income is genuinely a good idea for most people because of tax law. It’s not until you have assets that are worth more than your house that it becomes a good idea to pay off the entire loan. Meanwhile having even a small “quickloan” that is 0.1% of your annual income is a very stupid idea. I mean, if you don’t know finance at all then maybe it’s a good rule of thumb as you’ll never bury yourself in debt, but loans aren’t just loans.
  - xioxox 4y ago
    I'm pretty sure in the UK and Germany that you can't claim tax relief on mortgage interest of your own home.
- Thorrez 4y ago
BatteryMountain 4y ago
Also checkout the "rule of 72" if this stuff tickles you. It is also a rough estimate that gets used in place of more complex formulas. (Actually closer to 69/70 but 72 makes things cleaner)
- FabHK 4y ago
  The 72 is optimised, it seems to me, for annual compounding with percentages from 5% to 10% (as ln(2)/ln(1.08)*8 = 72.051746736), while, as you point out correctly, ln(2) = 0.69314718, so for continuous compounding 69 would be better indeed.

It used to be that the average monthly payment on housing would go up to around 25% of your spendable income, at least that was what the government used as a guideline. These days you need over 40% to even get anywhere and even that is unlikely to be enough. I've also noted around here the required income went from about 3-3.5 to around 5 times the rent rate despite that meaning you need a 6+ figure income for even the most basic apartments (which is rare here) which is just risk reduction for the owner.

Layke1123 4y ago

Early America when homes were steady at about that price.

orthoxerox 4y ago
In early America you just built your log cabin with an axe and an adze.
- xcambar 4y ago
  In early America, you pillaged and ransacked.
  - TecoAndJix 4y ago
    In early America, you string up with your fellow ammino acids in the primordial soup
    - xcambar 4y ago
      You won't get me to call Pangaea "early America". So typical of American imperialism. Only second to the Brits. ;)
user_named 4y ago
Pre-zirp. Monthly housing cost should not exceed a third of take home.

xcambar 4y ago

It's a rule of thumb that your total debt should not exceed 1/3 of your income. It has no economic foundations whatsoever. Yet, banking institutions use(d?) this rule to reject whatever application they were not comfortable with.

missedthecue 4y ago
I've never heard total debt should be 1/3 of income. Having a mortgage completely blows that up. Nevermind student loans, a car, or getting a credit card. I've heard that monthly housing shouldn't be more than 1/3 monthly take home. Is that what you're thinking?
- eru 4y ago
  > I've never heard total debt should be 1/3 of income. Having a mortgage completely blows that up. Nevermind student loans, a car, or getting a credit card. Or investing on margin.
EnKopVand 4y ago
> It's a rule of thumb that your total debt should not exceed 1/3 of your income. Unless tax deductions work very different in the US than they do in Denmark, that is pretty bad advice. Here, sitting on a 60% mortgage loan that is many times higher than your annual income is genuinely a good idea for most people because of tax law. It’s not until you have assets that are worth more than your house that it becomes a good idea to pay off the entire loan. Meanwhile having even a small “quickloan” that is 0.1% of your annual income is a very stupid idea. I mean, if you don’t know finance at all then maybe it’s a good rule of thumb as you’ll never bury yourself in debt, but loans aren’t just loans.
- xioxox 4y ago
  I'm pretty sure in the UK and Germany that you can't claim tax relief on mortgage interest of your own home.
Thorrez 4y ago

BatteryMountain 4y ago

Also checkout the "rule of 72" if this stuff tickles you. It is also a rough estimate that gets used in place of more complex formulas. (Actually closer to 69/70 but 72 makes things cleaner)

FabHK 4y ago
The 72 is optimised, it seems to me, for annual compounding with percentages from 5% to 10% (as ln(2)/ln(1.08)*8 = 72.051746736), while, as you point out correctly, ln(2) = 0.69314718, so for continuous compounding 69 would be better indeed.