Should You Ignore Your Net Income?

You should know the difference between gross income and net income and when to use each figure. If you're creating your monthly budget, you must use your net income because that's the money you have to work with . If you're applying for a loan or credit card, use your gross income instead of your net income; that is what they expect and assumption are made about what is actually available to you from your gross income.

Net income is to an person’s or business’s income after all expenses have been paid. Net income will always be less than gross income. Taxable income tends to be based on some form of net income. This can affect the amount owed in capital gains taxes, social security taxes, and more.

Factors that can make one’s net income lower than one’s gross income include:

• Cost of living expenses

• Contributions to retirement accounts (such as an IRA)

• Health insurance premiums

• Payments on student loan interest

• Upkeep of rental property

Such expenses are documented on a tax return form and will affect what the government considers to be a person’s or business’s total taxable income for the year.

In general, budgeting using net income is wiser and more realistic than planning using your gross income. Understanding net versus gross income is important for your budget, taxes, loan applications, and more. Taking the time to understand how to calculate them and the different ways they affect you can help you be better prepared and lead to better decisions about your money management.

Sit down with a Lionhood Financial Coach to figure out how to classify your income!