What is the difference between gross income and net income?

The distinction between gross income and net income is crucial for understanding personal finances. Gross income represents the total earnings an individual receives before any deductions such as taxes, retirement contributions, or other withholdings. It gives a clear picture of one's overall earning potential before any financial obligations reduce that amount.

Net income, on the other hand, is what an individual takes home after all those deductions have been subtracted. This figure reflects the actual amount available for spending, saving, and investing. It is essential for budgeting and financial planning because it represents the available funds for an individual's everyday expenses and savings goals.

Understanding this difference helps individuals make informed decisions regarding their finances, as they can better assess their spending capabilities and financial health based on their net income rather than just their gross income. The other options misinterpret or confuse these fundamental concepts, failing to accurately represent the relationship between gross and net income.