What Is Household Income? Knowing Yours Can Help You Budget and Save
Household income is the total gross income of everyone above the age of 15 living in the same residence. Unlike family income, the members of a single household do not necessarily have to be related. The gross income of a household includes any money earned from wages, salary, investments and interest.
How Is Household Income Calculated?
The first step in calculating household income is figuring out the gross income of every household member older than 15 years of age. Then, simply add everyone’s gross income together to get your household income value.
Aside from salary, there are many sources of income that should be accounted for when calculating gross income. With few exceptions, any incoming cash flow should be included in the gross income calculation. The following chart lists the common types of household income and whether they should be included:
|Supplemental Security Income||No|
|Social Security Disability Income||Yes|
|Retirement or pension income||Yes|
|Investment income and dividends||Yes|
|Alimony||Yes if divorce or separation was finalized before January 2019|
|COVID-19 stimulus payments||No|
A useful example of how household income might be calculated is a case in which two siblings and a friend all live together in one household. If one sibling makes $40,000 per year and the other makes $50,000, their combined annual gross income is $90,000. If their friend makes $30,000 per year, that means their annual household income is $90,000 plus $30,000, for a total of $120,000.
What Is Household Income Used For?
Household income is typically used as a primary indicator by many institutions and programs. Three common uses of household income are lending and mortgages, health insurance coverage and subsidies, and economic and government analysis.
Lending and Mortgages
Financial institutions and banks often use household income to determine whether they should approve a loan and how much money they should lend to customers.
This is especially true for large loans like home mortgages. For qualified mortgages in which household income is used as the income figure in a debt-to-income ratio, the maximum allowable ratio is 43%. This number assures the lender that the applicant(s) will be able to repay the loan.
Good To Know
When you apply for a credit card, financial institutions ask for your income for similar reasons — they want to make sure you’d be able to pay back any credit card debt you accrue. Because of an amendment to the Credit Card Act of 2009, you can use your household income for credit card applications, provided that you are over 21 and can reasonably expect access to household income funds.
Health Insurance Coverage and Subsidies
Aside from loans, household income is often used to determine eligibility for different types of health insurance coverage. Individuals below certain household income thresholds can qualify for different plans or health insurance subsidies through various marketplaces.
For example, adults in California qualify for Medi-Cal if their household income is 0% to 138% of the federal poverty level. If their income is less than 400% of the federal poverty level, they qualify for health insurance subsidies under either Covered California or the Affordable Care Act.
Economic and Government Analysis
On a broader scale, economists and government institutions use median household income to determine the national, regional or urban standard of living and wealth. It’s one of the most useful economic gauges of the financial resources held by households in a given area and, therefore, how much people will spend. Median household income is a snapshot of an area’s economic health.
The median household income in the U.S. in 2019 was $65,712. In the state of Texas, it was $64,034 and in California, it was $80,440. Comparing state numbers against national ones helps economists and the federal government analyze financial situations at the regional and national levels.
What’s the Difference Between Household Income, Family Income and Per Capita Income?
Household income combines the income of any single household — the people living together in one dwelling. However, family income and per capita income are quite different.
Whereas members of a household do not necessarily need to be related for their income to be calculated as part of household income, members must be related for their income to be factored into family income. They must be related through one of the following:
Additionally, a single person cannot have a family income because they are not considered to be a family. In contrast, per capita income takes into account only one individual’s income at a time because it measures the average income per person in an area. Even if two income earners are living together or are family members, their income will be considered separately when calculating per capita income.
Budgeting Based on Your Household Income
Estimating the amount of your household income can help a great deal with budgeting, but there are many other necessary accounts and deductions to keep in mind.
To get a full picture of your finances, you’ll not only want to look at your household income but also the current amount you have in your savings and investment accounts. Then, you’ll need to factor in taxes, given that household income is calculated based on pretax income. Payments for outstanding loans and expenses should also be included.
However, if you don’t need too much detail, household income is a simple way to create a quick estimate. With these numbers in mind, you can organize a budget plan or choose an existing budgeting framework that fits your needs and helps you save for emergencies and the future.
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- HealthCare.gov. "What to include as income."
- Consumer Financial Protection Bureau. 2019. "What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important?"
- U.S. Census Bureau. "United States of America."