When you first get hired to a job, the employer quotes your gross salary or gross hourly pay. But your net salary will most likely matter to you more in your day-to-day life. Make sure you understand exactly what your net salary includes (or better yet, excludes) because you might come across a number of scenarios where you need to know your net salary offhand.
Net salary is your gross (total) income less required taxes that an employer withholds from your paycheck. That includes both federal and state taxes, as well as Social Security and Medicare payments. Review your pay stub to see the total listing of tax deductions that reduces your gross income to determine your net salary. Technically, salary commonly refers to the total income you receive from the employer on a yearly basis, but it can also refer to your weekly, biweekly or monthly income.
It's important to differentiate between net salary and disposable income. In some cases, your net salary is your disposable income. It's the amount of money listed on your paycheck for cashing. However, disposable income is not always the same as your net salary because of additional reductions to your pay --- some voluntary and some court-ordered. For instance, if you make support or debt payments to a third party, that amount gets deducted from your net income to determine your final disposable income (the amount you can spend). If you participate in a savings fund, the contributions reduce your salary as well.
Creating a personal budget is one specific scenario where it's important to focus on your net salary (or disposable income, if you have additional reductions from pay) instead of your gross income. When you put together your budget, you need to list your expenses and the take-home pay you bring in each month.
Financial author Elizabeth Warren states that you should reserve at least 20 per cent of your net salary (after-tax income) for saving toward your future. That might include saving for retirement, a major purchase or toward a college fund for your kids. If you adopt this policy, 80 per cent of your net salary goes toward your bills, debts and personal expenses.
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