What Is the Meaning of Median vs. Average Income?

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.

A financial advisor can build you a financial roadmap that meets your budget and long-term goals.

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.

When comparing your income with government statistics, check how the data defines income. The Census Bureau’s standard household income measure is based on money income before taxes, while it publishes post-tax household income separately. Earnings statistics can also measure wages and salaries rather than total household income. These figures are not directly comparable with your take-home pay unless they use the same definition.

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.

An average, or mean, is calculated by adding all incomes in a group and dividing the total by the number of people or households included. A small number of high incomes can pull the average above what most members of the group earn.

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. For this reason, the median can be more useful for identifying the income near the middle of a group.

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. The difference shows how a higher income at the top of a group can pull the average above the incomes earned by most people in that group. It does not, by itself, show the distribution of financial wellbeing.

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. 

Because the median identifies the midpoint rather than averaging every value, a high or low income at either end of the group has less effect on the measure. This makes the median useful when you want to compare your income with the midpoint of a group.

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. The average incorporates every income in the calculation, while the median identifies the midpoint of the distribution. Looking at both can show whether higher or lower incomes are creating a gap between the two measures.

For example, an increasing average alongside little change in the median can indicate that income gains are occurring above the midpoint of the distribution. You would need additional data to determine where those gains occurred and how the overall income distribution changed.

How Median and Average Income Can Tell Different Stories

The difference between median and average income becomes clearer when a group includes one income that is much higher than the rest. Consider five households with annual incomes of $40,000, $50,000, $60,000, $70,000 and $280,000.

The median is $60,000 because that is the middle income when the five values are arranged from lowest to highest. The average is $100,000 because the households have $500,000 in combined income, which is divided by five. The $280,000 income raises the average without changing the midpoint.

This difference is one reason median income is often used to describe what a person or household near the middle earns. The average still provides useful information because it reflects every income in the group, including those at the top and bottom of the distribution.

How to Use Median or Average Net Income in Financial Planning

Median and average net income can help you understand how your earnings compare to others and guide your financial choices. Median income shows the middle point, meaning half of people earn more and half earn less. Average income adds up all incomes and divides by the number of people. Median is often more helpful because it is not affected by a few very high or very low incomes.

For example, comparing your income with the median for a similar group can show whether you fall above or below its midpoint. An average that is much higher than the median can indicate that higher incomes are pulling the mean upward, so the two figures can give different impressions of where your earnings stand.

Income comparisons alone should not determine how much you save, invest, or use to pay down debt. Expenses, household size, location, existing assets, liabilities and financial goals also affect how much money you can direct toward each priority. Median and average figures can provide context, but your own cash flow and financial obligations provide a better basis for setting savings and spending targets.

Bottom Line

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 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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