Gross Income vs. Net Income
Gross and Net income are not the same for individuals as they are for businesses. So first let's break down what they are to individuals and then what they are to businesses.
Gross income is the total pay you earn from employers or clients before taxes and other deductions are taken out. This is not limited to income received in cash payments, it can also include property or services received.
Net income refers to your income after taxes and deductions are taken and paid. The amount of money that remains after these payments is what is known as net income.
Let's give you an example: say you gain $800 a week from your employer or clients, your gross wages for a week are $800 because this is the amount your employer or clients pay you. However, from this amount of $800 you are liable to pay taxes and are able to claim deductions. Let's say, after applying these, you take home only $675 out of the $800. These $675 are your net income, which is the remainder of your income after taxes and other deductions were taken out.
For companies, on the other hand, gross income is revenue after cost of goods sold (COGS) has been subtracted, and NER Income are the earnings or profits of the business.
How Gross Income and Net Income Can Affect Your Budget
When it comes to your budget, it’s important to know which amount to use to make the most financially wise: gross income or net income. Since your net income is your take-home pay, or the money that you’ll actually earn on pay day, it may be best to focus on that number when creating a budget.
After figuring out how much you take home, your net income, start tracking how much you spend every month.
Start with your fixed costs, such as your:
- Rent or mortgage
- Utility bills
- Student loans
- Anything else that requires a monthly payment.
Next, round up your variable expenses.
These may include your:
- Monthly grocery bill
- Gas for your car
- Credit card bill
- Any other costs that are typically variable
Once you have your fixed costs and variable expenses totaled, add the two amounts together to determine how much you’re spending every month. Take this total and subtract it from your total monthly net income, aka your take-home pay. What is left from this subtraction is yours to save or spend.
Options of what you can do with this budget include, saving that money or paying any of high-interest debts you may have,
However, if there is no money left or the number is negative once you subtract your fixed costs and variable expenses from your net income, then you may want to consider cutting costs by looking at your expenditures to decide where you can feasibly cut spending.
If you have more questions, or need further guidance on planning your budget and/ or your tax strategy, let’s discuss. I'm always happy to provide detailed and personalized guidance through a 1:1 consultation. You may book the best day and time for you to meet by contacting me to schedule your consultation.