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What is Personal Income?

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  • Written By: Laura M. Sands
  • Edited By: Heather Bailey
  • Last Modified Date: 14 September 2016
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Personal income is the term generally used to describe an individual’s total income received from all sources. These sources include employment, investments and rental income. Personal income is equal to adjusted gross income (AGI), plus health care costs, taxes and deductions, and any other income extractions.

Personal income is also sometimes referred to as personal net income or adjusted gross income. After all health care costs, taxes and deductions for benefits have been extracted from a person’s gross income, personal net income or adjusted gross income is what remains. Adjusted gross income is a term that is commonly used by governmental tax agencies.

After necessary expenditures, such as rent or mortgage costs, food costs, household bills and personal bills are paid from the total amount of an individual’s personal income, what remains is referred to as discretionary income. It is this part of one’s personal income that is used for savings, investments, entertainment or recreational expenses. Sometimes governments refer to discretionary income as disposable income.

Discretionary income is decreased when expenditures, such as rent, food and clothing are high. Conversely, it rises when these expenses are kept to a minimum. Some engage in a practice known as downshifting as a way to increase discretionary income. Downshifting sometimes includes the act of deliberately living far below one’s personal income means in an effort to spend less and save more.

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Knowing exactly how income is defined is important when conducting business with financial institutions, such as banks and other lenders. It is also important when making financial investments or conducting business with other investors. For instance, when purchasing real estate, lenders use a specific formula to calculate an individual’s disposable income to determine if an individual qualifies for a mortgage loan and can ultimately afford the overall long-term cost of a particular property.

The amount of money that people can spend on services and products is directly related to the amount of personal income each receives. Collectively, these amounts are studied by governments, nonprofit groups and corporations to establish an area’s economic strength or lack thereof. The results of these personal income studies are helpful in forecasting the future economic growth of a community or state. Such studies are also used to help determine areas where generational poverty has occurred and where additional help or intervention is needed in helping households rise above poverty levels.

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MrMoody
Post 4

@David09 - Here’s the best advice that I can give anyone. Before you take that high paying job, get online and use an income tax calculator. Punch in your anticipated gross monthly income from the job and the calculator will tell you what you have left over.

You’ll be surprised to discover that your increase is marginal and that will help you decide if it’s worth it. The time tested approach to really improving your net income is to reduce household debt like credit cards, mortgage, car payments and so forth. Reduce your fixed costs and you can get by on less. You won’t be hit with a tax penalty too.

David09
Post 3

@SkyWhisperer - Actually that number seems quite high. Real poverty for that scenario should be about half that income. Otherwise there are a lot of families in America treading water. I think in that income range they do get a lot of deductions and stuff.

It’s true however that we do have a progressive income tax. Does it penalize achievement? Perhaps in a sense that it does, but so what? If you’re determined to get wealthy, you plow ahead anyway, moving higher and higher, working more hours if you have to, starting a business on the side – whatever you have to do.

That’s my philosophy anyway. I want to make enough money so that even if Uncle Sam takes his so called “fair share” (whatever that is), I have enough left over to live well.

SkyWhisperer
Post 2

@Charred - I tend to agree. What’s interesting when looking at personal income statistics is to discover just what is considered a poverty level.

I heard on the radio that if you are family of four making $50,000 a year then you are at borderline poverty. I partly believe that’s true, but just look at that figure.

Fifty grand a year, you would think, would be enough for a family of four to get by, but apparently not. If the government really wants to change those statistics then they need to slash taxes.

Charred
Post 1

Life would be great if my personal net income matched the gross income. I wouldn’t need to keep pushing for making more and more money. The more money I make, the higher the income tax bracket, and the more the government takes out in taxes.

It gets to be an exercise in futility at some point, and I don’t have this unlimited supply of deductions to reduce my taxes. At the end of the day I am left with less disposable personal income than I would like to have.

Personally I think that we should favor an across the board flat tax or a consumption tax, completely eliminating the personal income tax.

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