What is the key difference between gross income and net income?

The key distinction between gross income and net income lies in the timing of financial calculations in relation to deductions. Gross income represents the total amount earned by an individual or business before any deductions are applied. This includes wages, bonuses, and any other income sources. In contrast, net income is the amount remaining after all necessary deductions, such as taxes, retirement contributions, and other withholdings, have been subtracted from the gross income.

Understanding this difference is fundamental for personal financial planning, as net income gives a clearer picture of the actual funds available for spending, saving, or investing after mandatory deductions have been accounted for. This distinction is crucial for budgeting efforts, determining disposable income, and making informed decisions about financial commitments.