Net Income
Net income summary:
Net income is what's left after taking out taxes and deductions for insurance or retirement plan contributions.
When you make a personal budget, you use your net income to determine how much money you have to cover expenses, save, and repay debt.
Your net income may influence your debt relief options if you need help with credit cards or other unsecured lines of credit.
Net income definition and meaning
Net income is the money you get to keep after your employer subtracts taxes, insurance, and retirement plan contributions. It's your take-home pay, the money that goes into your bank account on payday. You use net income to budget since it's the amount of money you have to work with.
Your net income is also important if you need debt relief. For example, if you're interested in resolving debts , the Debt Consultant will ask about your net income. That’s how they’ll help you figure out how much of a monthly payment you could afford to make toward your debts.
Lenders may consider net income to approve you for credit, but more often they look at gross income, which is your income before any deductions. They use your gross income to figure out how much of your income goes to paying off debt each month, or your debt-to-income ratio (DTI). This is how much of your gross pay goes to paying off debt each month.
Key concept: Net income is your income after taxes and other deductions.
More on net income
You have financial goals, and a personal budget is one of the tools you use to reach them. Before you sit down to make a budget, it helps to know how to decode your paychecks. That's where net income becomes important.
The dollar amount on your check is your net income and it's what you'll use to map out your monthly spending plan.
If you're self-employed, net income is what you get to keep after you deduct business expenses from the revenue you bring in.
Net income: a comprehensive breakdown
Net income is your take-home pay. If you work for an employer, certain amounts of money get taken from your paychecks right off the top. They include:
Federal income tax
State income tax
Social Security and Medicare tax
What's left is your after-tax pay. But those aren't the only amounts you might see deducted. Your employer may also subtract amounts for health insurance, retirement plan contributions, or union dues.
Once taxes and deductions are taken out, what you're left with is your net income. You might see it listed as net pay on your pay stubs.
Net income vs. gross income
When you read your pay stubs, you should see an entry for net income and another for gross income. Gross income is your total pay before taxes and other deductions are taken out.
That's important to know when you're ready to budget, make a plan to save, or repay debt. If you base your budget on your gross, it won't work, since you're budgeting with money that you don't actually have.
How to calculate net income
Net income is fairly easy to calculate. You'll just need to know two things:
Gross pay
Deductions
To find net income, you subtract deductions from gross income. The result is your net pay. (You can use a paycheck calculator to do the math.)
If you run a business, the formula is a little different. You'll add up your gross revenue, then subtract business expenses, taxes, and any other costs you pay to operate.
Real-life examples of net income
It's normal for your net income to be less than your gross. But just how much of your pay do you get to keep?
Let's assume you earn a gross salary of $75,000 annually. You get paid biweekly, and you put 10% of your pay into your 401(k). You pay $50 per pay period for health insurance and you live in Florida, which doesn't have a state income tax.
Here's how your paychecks could break down:
Gross pay: $2,884.62
Federal income tax: $237.62
Social Security tax: $175.75
Medicare tax: $41.10
Health insurance: $50
401(k) contributions: $288.46
Net income: $2,091.69
You'd have less net income if you lived in a state that charges state income taxes.
Once you know your net income, you're ready to knock out your budget and debt repayment plans .
Net Income FAQs
What does it mean to live paycheck-to-paycheck?
Living paycheck-to-paycheck means that once you get paid and cover expenses, there's nothing left until you get paid again. People who live paycheck-to-paycheck may lack emergency or long-term savings, and they may be in debt if they use credit cards to cover expenses. Paycheck-to-paycheck living can be the result of an income problem, a spending problem, or a combination of factors such as heavy medical expenses.
What’s the ideal paycheck breakdown?
There is no ideal paycheck breakdown since everyone’s financial situation is different. For a simple framework, you might consider the 50/30/20 budget . With this budgeting system, you allocate 50% of your take-home pay to needs, 30% to wants, and 20% to savings and debt repayment. You could adjust the percentages up or down to match how you spend.
What are some effective strategies to reduce expenses when living paycheck-to-paycheck?
Some of the best ways to cut expenses when living paycheck-to-paycheck are:
Cancel subscription services you don’t need or use.
Plan meals around what’s on sale, and use coupons or cashback apps to save on groceries.
Raise your car insurance deductible or shop around for a cheaper policy.
Take advantage of your local library, especially if you have kids and need some fun (and free) things to do.
Downsize your home or vehicles, if possible.
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