You may have heard that you should use your gross income for financial planning. If you and your spouse make $150,000 a year, it might seem easiest to base everything on that number. But this could actually make your calculations more difficult.
For the most accurate projections, use your net income. You’ll see what net income is below, along with why it’s important and how to find yours.
What Is Net Income?
Net income is your take-home pay, or the money that actually hits your checking account and that you get to use. To find your net income, simply look at how much money is deposited into your bank account each pay period. If your paycheck is split across multiple accounts, take the sum of the deposits for all of them.
Net income is also known as net pay, net salary, net monthly income, and annual net income.
Net Income vs. Gross Income
Your gross income is your total pay or total income - essentially your full salary - before anything is taken out. Your net income is what you get to use after all deductions, which can include:
Federal income tax
Social Security tax
Medicare tax
State and local taxes
Health insurance premiums
Other employer benefit premiums and deductions
Contributions to HSA and FSAs
Contributions to an employer-sponsored retirement plan
Quick Net Income Calculation
According to Natalie Taylor, CFP, most people’s net income is between 50% and 75% of their gross income. So if you earn a salary of $150,000 per year, your net income is most likely between $75,000 and $112,500. Your net-to-gross ratio will typically be lower if you make more money, because you’ll pay more in taxes and may save more into your workplace retirement plan.
It’s helpful to know your net-to-gross income ratio to understand where your salary goes and the percentage you actually take home. To calculate this, start with the amount deposited to your bank account each pay period, and divide it by the gross wages on your paycheck.
Net Income Example
Let’s say your salary is $150,000 per year and you’re paid semi monthly (twice per month). You receive a direct deposit of $4,375 every pay period, and the gross wages on your paycheck are $6,250. To determine your net-to-gross income ratio, divide $4,375 by $6,250, which comes out to 70%.
Pro Tip: Consult your accountant to determine net income from investments, AirBnBs, or side hustles, since the gross amount from these sources will hit your accounts - not the net - and you’ll need to set aside funds to pay taxes.
Why You Need to Know What Net Income Is
Net income is the most important number to use for accurate budgeting. If you use gross income instead, you’ll think you have more money to spend than you actually do.
To illustrate this, let’s go back to the example above. You earn $150,000 a year with a 70% net-to-gross income ratio. If you build a monthly budget based on the total income on your paycheck, you’ll think you can spend $12,500 per month.
The problem is that you’re really taking home $8,750 per month. That means you have a shortfall of $3,750 between the amount you think you can spend and what you actually can.
Pro Tip: When you’re budgeting, start with the three major budget categories of fixed expenses, flex expenses, and non-monthly expenses. For more, see our article: The 23 Budget Categories You Need in Your Budget
What to Do When Your Net Income Increases
When your net income increases, come up with a plan for how you’ll allocate that money before it hits your bank account. A good approach is to use 10% for something fun and put the rest towards your goals. This lets you enjoy your additional income while still using most of it to improve your financial situation.
You can use this strategy for a raise or a one-time increase like a bonus. You may not know your net income from either one until you get paid. For example, if you get a $10,000 raise, you’ll likely take home 50% to 75%, depending on your net-to-gross ratio. So, your take-home pay could increase by $5,000 to $7,500 annually.
How to Plan for an Increase
Since you won’t know the exact dollar amount, use percentages to plan for an increase in net income. You might decide to put 30% of a raise toward your daughter’s college fund, 60% toward retirement, and 10% towards something fun. Here are a few financial goals to consider:
Pay off debt. Start with high-interest debt (above 7%).
Increase your emergency fund. Start by saving one month’s worth of take-home pay. Then aim to save three to 12 months depending how stable your employment is, whether you own a home, and how many dependents you have.
Raise your retirement plan contributions. Start by contributing enough to max out any employer match. From there, look to increase contributions to 10% or 15% of your gross income.
Use it to save for big future expenses. For example, you could set up a savings account for a down payment on a home or a 529 plan for your children’s college savings.
Build a Better Budget
Your budget is a key part of managing your money and taking control of your spending. To budget accurately, you need to know your net income so you can use it in your calculations. That includes knowing your net monthly income and annual income, so you know how much money you have available in the short and long term.
You can budget and manage your money better with an intuitive financial software tool like Monarch Money. The app can help you track all your account balances in one place, and get useful spending insights to see where your money is going.You may have heard that you should use your gross income for financial planning. If you and your spouse make $150,000 a year, it might seem easiest to base everything on that number. But this could actually make your calculations more difficult.
For the most accurate projections, use your net income. You’ll see what net income is below, along with why it’s important and how to find yours.
What Is Net Income?
Net income is your take-home pay, or the money that actually hits your checking account and that you get to use. To find your net income, simply look at how much money is deposited into your bank account each pay period. If your paycheck is split across multiple accounts, take the sum of the deposits for all of them.
Net income is also known as net pay, net salary, net monthly income, and annual net income.
Net Income vs. Gross Income
Your gross income is your total pay or total income - essentially your full salary - before anything is taken out. Your net income is what you get to use after all deductions, which can include:
Federal income tax
Social Security tax
Medicare tax
State and local taxes
Health insurance premiums
Other employer benefit premiums and deductions
Contributions to HSA and FSAs
Contributions to an employer-sponsored retirement plan
Quick Net Income Calculation
According to Natalie Taylor, CFP, most people’s net income is between 50% and 75% of their gross income. So if you earn a salary of $150,000 per year, your net income is most likely between $75,000 and $112,500. Your net-to-gross ratio will typically be lower if you make more money, because you’ll pay more in taxes and may save more into your workplace retirement plan.
It’s helpful to know your net-to-gross income ratio to understand where your salary goes and the percentage you actually take home. To calculate this, start with the amount deposited to your bank account each pay period, and divide it by the gross wages on your paycheck.
Net Income Example
Let’s say your salary is $150,000 per year and you’re paid semi monthly (twice per month). You receive a direct deposit of $4,375 every pay period, and the gross wages on your paycheck are $6,250. To determine your net-to-gross income ratio, divide $4,375 by $6,250, which comes out to 70%.
Pro Tip: Consult your accountant to determine net income from investments, AirBnBs, or side hustles, since the gross amount from these sources will hit your accounts - not the net - and you’ll need to set aside funds to pay taxes.
Why You Need to Know What Net Income Is
Net income is the most important number to use for accurate budgeting. If you use gross income instead, you’ll think you have more money to spend than you actually do.
To illustrate this, let’s go back to the example above. You earn $150,000 a year with a 70% net-to-gross income ratio. If you build a monthly budget based on the total income on your paycheck, you’ll think you can spend $12,500 per month.
The problem is that you’re really taking home $8,750 per month. That means you have a shortfall of $3,750 between the amount you think you can spend and what you actually can.
Pro Tip: When you’re budgeting, start with the three major budget categories of fixed expenses, flex expenses, and non-monthly expenses. For more, see our article: The 23 Budget Categories You Need in Your Budget
What to Do When Your Net Income Increases
When your net income increases, come up with a plan for how you’ll allocate that money before it hits your bank account. A good approach is to use 10% for something fun and put the rest towards your goals. This lets you enjoy your additional income while still using most of it to improve your financial situation.
You can use this strategy for a raise or a one-time increase like a bonus. You may not know your net income from either one until you get paid. For example, if you get a $10,000 raise, you’ll likely take home 50% to 75%, depending on your net-to-gross ratio. So, your take-home pay could increase by $5,000 to $7,500 annually.
How to Plan for an Increase
Since you won’t know the exact dollar amount, use percentages to plan for an increase in net income. You might decide to put 30% of a raise toward your daughter’s college fund, 60% toward retirement, and 10% towards something fun. Here are a few financial goals to consider:
Pay off debt. Start with high-interest debt (above 7%).
Increase your emergency fund. Start by saving one month’s worth of take-home pay. Then aim to save three to 12 months depending how stable your employment is, whether you own a home, and how many dependents you have.
Raise your retirement plan contributions. Start by contributing enough to max out any employer match. From there, look to increase contributions to 10% or 15% of your gross income.
Use it to save for big future expenses. For example, you could set up a savings account for a down payment on a home or a 529 plan for your children’s college savings.
Build a Better Budget
Your budget is a key part of managing your money and taking control of your spending. To budget accurately, you need to know your net income so you can use it in your calculations. That includes knowing your net monthly income and annual income, so you know how much money you have available in the short and long term.
You can budget and manage your money better with an intuitive financial software tool like Monarch Money. The app can help you track all your account balances in one place, and get useful spending insights to see where your money is going.
