You can get useful perspective about your financial condition and performance by benchmarking your income against peers using figures for average and median income. Each of these measures offers a somewhat different snapshot. While medians better reflect typical middle-of-the-road incomes, averages capture collective earnings across a group. Understanding the nuances helps savers and investors select an appropriate way to compare their incomes when making key financial decisions. Consider consulting a financial advisor to get individualized advice about different approaches to assessing your income.
What to Know About Net Income
Your net income is equal to your take-home pay after accounting for taxes and other deductions. It is helpful or even vital to know your net income because this is how much of your earnings you actually get to keep.
Regularly tracking your net income over time helps you develop a picture of how much disposable income will be available to allocate toward saving, spending or investing goals. You can also compare your net income against your peers. This gives you some context to evaluate your relative financial wellbeing.
Businesses also calculate net income by subtracting expenses and taxes from gross income. Investors look at public company reports of net income when deciding which securities to purchase.
Average Net Income vs. Median Net Income
To summarize and compare incomes meaningfully using averages and medians it helps to gain some more understanding of the concepts. In statistics, these are measures of central tendency. Central tendency measures attempt to use a single value to describe an entire set of data.
Averages, also called means, measure collective incomes across a population. Averages are useful and easy to calculate but can be skewed higher by extremely high outlier incomes at the top end.
Medians arrange incomes from lowest to highest, then identify the middlemost income where an equal number fall above and below. This eliminates the outsized influence of outliers. Median income figures are usually lower than average income figures.
How to Calculate Average Net Income
Calculating average net income involves totaling all incomes across a group, then dividing this combined income figure by the number of people. For example, consider five individuals with incomes of $30,000, $50,000, $60,000, $70,000 and $100,000. Their total combined income equals $310,000. Dividing this by five people gives an average income of $62,000.
Note that in this example, the average of $62,000 exceeds the incomes of three out of the five individuals. This is due to the outsized impact of the $100,000 outlier earnings figure. When averages differ markedly from typical incomes, it generally signals that incomes are concentrated among high earners and indicates that financial wellbeing is not broadly shared.
How to Calculate Median Net Income
Determining median net income requires arranging all incomes from lowest to highest, then identifying the middlemost income where an equal number fall above and below. For the above example with incomes of $30,000, $50,000, $60,000, $70,000 and $100,000, you would organize them from lowest to highest to determine that the median income equals $60,000.
By focusing specifically on the income midpoint unaffected by outliers on either end, medians can provide a more accurate reflection of typical middle-class incomes within a peer group. This often allows better income benchmarking for ordinary savers, investors and retirement planners.
When to Use Median vs. Average Net Income
In situations where average and median incomes are not too different, both measures may reasonably summarize incomes. But when averages exceed medians substantially due to high-end outlier earnings skewing the data, medians better reflect middle-of-the-road incomes.
That does not mean averages are useless or always misleading. Averages provide useful perspective into collective incomes overall. With that in mind, simultaneously considering both median and average income measures can create a more complete picture. For instance, consider a case where the average income figure is rising over time while the median income figure is not changing significantly. This can suggest that incomes are increasingly being directed to top earners rather than being distributed broadly across the spectrum.
While median incomes more accurately portray typical earnings, average incomes offer insights into overall earnings levels across a population. Appreciating these subtle differences allows individuals to get a different perspective by benchmarking against peers. Having access to median and average income figures can contribute to better decision-making when saving, spending and investing.
Tips for Personal Finance
- A financial advisor can analyze your income data and recommend personalized strategies for optimizing saving, spending and investing to meet your goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s Paycheck Calculator figures your take-home pay after accounting for federal, state and local taxes.
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