When calculating the percentages for each budget category, which income figure should you use?

• A. Pre-tax (gross) income
• B. Only investment income
• C. Total household assets
• D. After-tax (net) income

Answer: (D)

Verified step by step guidance

1. Understand the concept of after-tax (net) income: This is the income remaining after all taxes have been deducted from gross income. It represents the actual amount available for spending or saving.
2. Identify why after-tax (net) income is used for budgeting: Since budgeting involves allocating funds for expenses and savings, it is crucial to use the income figure that reflects the money you truly have available, which is after-tax income.
3. Clarify why pre-tax (gross) income is not appropriate: Gross income includes earnings before taxes and deductions, which does not accurately represent the funds available for budgeting purposes.
4. Explain why investment income and total household assets are not suitable: Investment income is a specific type of income and may not represent the full financial picture, while total household assets include non-liquid items like property and savings, which are not directly usable for monthly budgeting.
5. Conclude that after-tax (net) income is the correct figure to use for calculating percentages for each budget category, as it provides a realistic view of available funds for allocation.