Gross vs. Net Income

When you receive a job offer, the company quotes you a gross salary (e.g., $50,000 a year) or an hourly rate (e.g., $18 an hour). Unfortunately, this number represents what you earn before deductions, and you don’t get to keep all of it.

Gross Income – Deductions = Net Income

• Gross Income: This is the total amount of money you earn based on your agreed-upon wage. It exists only on paper. You will not see this total amount in your bank account.
• The Deductions: These are mandatory subtractions for items such as federal and state taxes, Social Security, and Medicare (which we will cover later).
• Net Income: This is often called your “take-home pay.” It is the actual cash you receive in your bank account.

Make sure you don’t build a budget based on your gross income. That amount is not available to you to spend.

You must always calculate your estimated net income before committing to renting an apartment or buying a car. If you don’t, you may find yourself running out of money before the month ends.