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The Difference Between Gross and Net Income
If you are in need for a quick explanation about the difference of gross and net income, you’re in the right place!
You’d be surprised how many people I have seen who use their gross income instead of net income when starting their budget. It can be more fulfilling to use a larger number to make yourself feel better about your earnings, but watch out!
Unfortunately, budgeting with your gross income can skew your numbers, making it appear you have more money to start off with!
Plus, it is highly recommended that beginner budgeters use a zero-based budgeting system so they can understand where each of their dollars go throughout the month.
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When basing a budget off gross income, it is very difficult to accurately predict the exact amount that will be deducted from your salary!
Gross Income
Gross income is the salary you have before taxes or any deductions are withdrawn.
How to remember: Imagine you’re a fisherman and the ocean is full of fish (money). All the fish equate to all your earnings.
TIPS:
- Don’t get too excited when you see this number!
The gross salary is what’s advertised for jobs, and what you may expect to be earning. However, there is a significant chunk of money that is taken from this amount at every paycheck! The amount removed may increase when you choose to invest in retirement accounts such as a 401K through the company, or put money aside for health insurance. - Do not budget with gross income!
Sure, this amount reflects your total income earned before all deductions, and it is easy to state that you earn that much. Technically, you do! However, this is not considered your take-home pay, so budgets should not be created with the gross income in mine. Think: “gross” = bad!
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Net Income
Net income is your income after your taxes and other deductions (taxable and nontaxable) are withdrawn.
How to remember: Think about using a fishing net to cast out into the ocean full of all the money, only to catch and keep some of the fish.
TIPS:
- Create your zero-based budget with this number as your goal!
A zero-based budget is one where you allocate every dollar to the last penny and “tell it where it goes”. No matter how you decide to form a budget, use your net income as the amount you have to spend. - Know that your net income doesn’t initially equate to spending money!
All because you receive a certain amount of money for your work, doesn’t mean there aren’t any more deductions! You must remember to allocate money for deductions such as vision, dental or other insurance, investments, and tithing or giving accounts. - Understand your paycheck!
Now that so much of our lives are automated and online, may of us don’t handle pay stubs anymore! However, I encourage you to look at your pay stub (yes, even if it is just an online version) so you can get a real understanding of how much money is deducted from your salary. It will be an eye opener!
Summary of Net and Gross Income:
- Gross Income = BEFORE taxes and deductions. It is not smart to create your budget based on this amount.
- Net Income = AFTER taxes and deductions. Create your monthly budget from this income amount!