Understanding Household Income: A Comprehensive Guide
Household income refers to the combined gross income of all members living in a household above a specified age. This can include spouses, dependents, and even unrelated individuals living under the same roof. Household income is crucial for evaluating the standard of living in an area, and lenders use it as a measure for underwriting loans.
Key Takeaways
- Household income encompasses the gross cash income of all household members.
- A household includes all individuals living together, regardless of relation.
- It’s used to gauge economic health and compare living conditions across regions.
- Definitions of household income may vary based on context or regulatory guidelines.
- Household income is one of three significant wealth measures — the others being family income and per capita income.
Delving into Household Income
Gross income before taxes within a 12-month period for all household members aged 15 and older falls under household income. This includes various forms of income like wages, salaries, self-employment gains, Social Security, pensions, investment earnings, and welfare payments.
The definition of household income can vary, influenced by legal, regulatory, or research contexts. For instance:
- The U.S. Census Bureau includes all pre-tax cash income of individuals aged 15+ in households, regardless of relation.
- In 2022, the Bureau reported the real U.S. median household income was $74,580.
- Some programs may also include non-cash benefits like food stamps to gauge household income.
- Definitions may differ based on specific government programs or studies.
Household income offers insights into the standard of living and serves as an indicator of economic health, aiding lenders in risk assessment, as lower-income households have a higher default risk.
Important Considerations
The per capita GDP and median household income should typically align, but a divergence has sparked debates about using median household income as a better economic well-being indicator.
Research Note: Average household incomes have risen since 1970, with significant gains in upper-income brackets.
Comparing Household, Family, and Per Capita Income
There are three main measures of wealth: household income, family income, and per capita income, each taking different approaches:
- Household income: All gross cash income for those 15+ in one housing unit, related or not.
- Family income: Only considers income from related individuals living together.
- Per capita income: The average income per individual in a defined area.
How Household and Median Incomes Differ
To determine average household income, sum all household incomes and divide by the number of households. Median household income places half of households above and half below a particular income level, often seen as a more accurate indicator than average due to the skewing effects of extremely high incomes.
Hypothetical Example
Consider Sam, who earns $120,000 annually, and his spouse Alex, who earns $80,000. Their total family income is $200,000. Including Sam’s nephew Jim, who earns $40,000, their total household income becomes $240,000, illustrating how all household members’ incomes are combined.
How Do You Define and Calculate Household Income?
Household income constitutes the total gross income from all members above 15 years within a year. This includes wages, salaries, retirement, and investment earnings, among others. To calculate household income, sum all gross income from each member aged 15 and older.
The Bigger Picture
Income includes funds earned through work or sales. Household income refers to the combined earnings of individuals under a single roof. This figure helps measure living standards and assess financial risks such as loan eligibility. Calculate household income by adding up every member’s gross income.
Related Terms: Family Income, Per Capita Income, Economic Health, Gross Income, Median Income.
References
- U.S. Census Bureau. “Median Household Income”.
- U.S. Census Bureau. “American Community Survey and Puerto Rico Community Survey: 2022 Subject Definitions”. Page 88.
- U.S. Census Bureau. “Income in the United States: 2022”.
- Congressional Budget Office. “The Distribution of Household Income, 2020”. Page 5.
- Health Insurance Marketplace. “Income Level & Savings”.
- Aitken, Andrew. “Measuring Welfare Beyond GDP”. National Institute Economic Review, vol. 249, no. 1, July 2019, pp. 3-16.
- Nolan, Brian; Roser, Max; and Thewissen, Stefan. “GDP Per Capita Versus Median Household Income: What Gives Rise to the Divergence Over Time and how does this Vary Across OECD Countries?” The Review of Income and Wealth, vol. 65, no. 3, September 2019, pp. 465-494.
- Pew Research Center. “How the American Middle Class Has Changed in the Past Five Decades”.
- Center for Disease Control and Prevention. “Family Income”.
- U.S. Census Bureau. “Per Capita Income”.
- Missouri Census Data Center. “All About Measures of Income in the Census”.
