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.
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.