Understanding Net Income
Net income is what remains after all taxes and expenses. For individuals, it's gross income minus taxes and work-related expenses. For businesses, it's revenue minus all costs including taxes. Net income represents actual spending power and is the foundation for budgeting, saving, and financial planning. Always base financial decisions on net income, not gross.
The gap between gross and net income can be substantial. A $100,000 gross income might yield $65,000-70,000 net after taxes, or less if you have significant business expenses, health insurance, or other deductions. This 30-35% difference is why people feel their salary doesn't go as far as expected - they're mentally using gross income but living on net income.
Increasing net income comes from three levers: increase gross income (raises, promotions, side hustles), reduce taxes (maximize deductions and credits, tax-advantaged accounts, strategic tax planning), or reduce expenses (negotiate lower rates, eliminate waste, increase efficiency). For most people, increasing gross income provides the biggest impact, but don't ignore the other levers - a 10% expense reduction is often easier than a 10% income increase.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Gross is total income before any deductions. Net is what's left after taxes and expenses - your actual spending power. Always budget based on net income. Many people overspend by thinking in gross income terms.
Three ways: increase gross income (ask for raise, side hustle, change jobs), reduce taxes (maximize deductions, tax-advantaged accounts, strategic planning), or reduce expenses (cut unnecessary costs, negotiate better rates).
For individuals: all taxes, work-related expenses (uniforms, tools, unreimbursed business expenses), and sometimes benefits if paid with after-tax dollars. For business: all costs of goods sold, operating expenses, taxes, interest, depreciation.
Similar but not identical. Take-home pay is gross pay minus taxes and benefits withheld. Net income typically also subtracts other expenses related to earning income. For W-2 employees, they're very close.
Taxes take 25-40% for most people (federal, state, FICA). Add retirement contributions, health insurance, and other benefits, and it's common to net only 60-75% of gross salary. This is normal and why budgeting based on take-home is crucial.