'Too Many People Don't Know What The Flip Their Own Money Is' — Dave Ramsey Explains Gross Vs. Net Income 'Delicately'

When Shari from Vermont wrote into "The Ramsey Show" asking about the difference between gross and net income, it didn't take the personal finance guru long to get to the point.

"Too many people don't know what the flip their own money is," Ramsey said as he led into his advice. "If you make $60,000 per year or $5,000 per month, gross, before taxes, but I ask you what your net is, and you say $2,500, which is $30,000 per year, then I've got to try to figure out — because apparently, you don't know — whether you have taken 401(k) out of that, health insurance out of that, whether you have your car payment deducted out of that."

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Ramsey goes on to explain that in the example above, $2,500 is not the caller's real net, but that's what they're coming home with because "you've had all this other crap taken out of your check."

What's Being Deducted From Your Paycheck?

Understanding what’s deducted from your paycheck is crucial to managing your finances. 

After your gross income is calculated, several deductions are made before you receive your net income or take-home pay. 

These deductions can include federal and state taxes, Social Security, Medicare, 401(k) contributions, health insurance premiums and possibly others like union dues or student loan payments.

It’s important to scrutinize each deduction to understand where your money is going. 

For instance, contributions to a 401(k) retirement savings plan are beneficial for your future financial health, while other deductions, such as for health insurance, protect you and your family in the present. Taxes are a given, but knowing how much is taken out can help you plan for potential refunds or payments during tax season.

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Additionally, some deductions, like for a car payment, might not be typical for everyone but can significantly impact your net income. By understanding these deductions, you can make more informed decisions about your finances, budget more effectively and potentially find ways to increase your take-home pay by adjusting contributions to retirement plans or reassessing your health insurance needs.

Ramsey's overarching guidance is this: Grasping the difference between gross and net income and knowing exactly what deductions are made from your paycheck empowers you to take control of your financial situation.

This knowledge is the foundation upon which you can build a budget that works for you, save for the future and navigate financial challenges more confidently.

"When somebody tells me take-home pay, I really don't know what they're talking about because that can mean so many different things — but I can back into it from gross and know where you stand," Ramsey said.

Consulting a financial advisor can help you better understand gross pay versus net pay. A professional can offer personalized advice on things such as tax withholding and retirement investing to help you make the best possible short- and long-term financial decisions.

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*This information is not financial advice, and personalized guidance from a financial adviser is recommended for making well-informed decisions.

Chris Bibey has written about personal finance and investment for the past 15 years in a variety of publications and for a variety of financial companies. He is not a licensed financial adviser, and the content herein is for information purposes only and is not, and does not constitute or intend to constitute, investment advice or any investment service. While Bibey believes the information contained herein is reliable and derived from reliable sources, there is no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information.