Definition of "Household Income"

Written by randolf saint-leger
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Definition of "Household Income"
Household income levels are an important measurement for business and government. (family image by Mat Hayward from Fotolia.com)

Household income is defined as the total income of all members of a household aged 15 years or older. Household members do not have to be related. The level of household income is an important underwriting criteria for lenders, as it is an indicator of spending power and a basis for study by private institutions and government.

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Gross Income Vs. After-Tax Income

Your gross income is the wage you receive before taxes are taken from your paycheck. Your after-tax income is how much you have left after federal, state and local taxes are deducted from your paycheck. This is your net pay. While gross income is important, lenders like to focus on the after-tax income because it is a truer measure of your spending power.

Debt-to-Income

Debt is part of our everyday lives. As we accumulate debt to finance everything from our education to our homes, we create a trail of credit accounts that get reported to the credit rating agencies. Therefore, how we manage our debt becomes extremely important. Another important metric for creditors is your level of debt-to-income. This ratio is used to measure household and individual debt levels relative to income. The higher the debt-to-income ratio, the more riskier the borrower.

Budgeting

Managing household finances takes on even greater significance as financial obligations increase. Decisions such as where you will work, live and how you spend your money all influence household income. The best way to manage household income is to know how much each member of the household earns less individual expenses. It may seem like a daunting task as bills pour in; however, proper tracking of income and expenditures helps the household to be more efficient in its spending and helps with spending decisions. A good tool is developing a household budget, which you can use to control and track expenses.

Demographics

Household income is a key component when analysing demographic trends. Household income is stratified into groups for the purpose studying spending behaviour and attitudes to target goods and services to various segments of the population. For example, a household income of £65,000 to £162,500 implies that household members are college-educated and may be more interested in financial service and high-end products as opposed to a household whose income is less than £19,500. The government also tracks household income for planning and budgeting purposes and to identify population changes.

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