Lesson 2 of 5

Gross pay vs. net pay: the number that actually matters

When people say "I make $55,000 a year," that's gross pay -- what your employer pays before any deductions. It's the number on offer letters and the number most people budget around, and it's also the number that leads to budgets that don't work, because it's not the money that ever touches your bank account. Net pay -- take-home pay -- is what's left after taxes, insurance, and retirement contributions. For most people, net pay lands somewhere between 70% and 85% of gross, depending on tax bracket, state, and how much they're contributing to benefits and retirement. A $55,000 salary might mean roughly $3,300-$3,600 a month in your account, not the $4,583 that gross pay divided by 12 would suggest. Every budget in this course, and in Paycheck Planner itself, works off net pay for exactly this reason. If you've ever built a budget that looked fine on paper and never matched your bank account, this is very often why.