Household income – is a sum of all household member’s gross income per year. The term explains itself quite clearly, there is a need of a few clarifications only. First, people are considered to be household members if they share a roof. They might be unrelated to each other. Second, household income include the earnings of members of a certain age (usually, over the age of 15). Third, this income shouldn’t necessarily be spent for the maintenance of the household. Basically, any earnings of the household members older than 15 years are included. Forth, this income consists of different types of payments such as wages, self-employment earnings, profits from investments, social and retirement benefits, etc. Fifth, if a person lives alone, his or her earnings will be seen as household income as well (because it meets all the requirements of the term definition).
Different meanings of the term
We’ve presented one of the main definition of the term “household income” that is common in the US, but may vary in different contexts. Let’s consider some examples:
- The U.S. Census Bureau defines household income exactly as we’ve described it before – it’s a combined gross annual income of related or unrelated people over the age of 15 who live together.
- The Congressional Budget Office, beside wages and other cash earnings, consider non-cash, or material benefits like food stamps as a part of household income.
- Also, various research and surveys might put different meanings into the household income definition, according to their aims.
Household Income significance
Household income is a form of risk insurance for a lender, because it demonstrates the household’s ability to pay a debt back and which amount of debt exactly. Usually, the lower household income is, the higher is the possibility of its debt default.
Also, these metrics are used for living standards' evaluation because they reflect the life quality in various countries, regions, states, or areas. They might represent the state of a country’s economy as well. Some experts believe that household income better demonstrates the economic health of the country than a per capita gross domestic product (GDP), which typically represents it.
Along with household income, other types of wealth evaluation are frequently used, such as family income and per capita income. The meanings of these terms will be disclosed further.
Comparison of Household Income and other related terms
Family income and per capita income are closely related to household income. All of them are designed to measure people’s financial well-being, but they make it differently. Let’s highlight the differences between these terms:
- Household income defines a combined income of people living together, despite their relation to each other or the fact that a household might consists of one person living alone.
- Family income is also the combined income of people sharing a roof, but in contrast to the previous term, they should be related somehow, e.g., by blood or by law. If a person lives alone, his or her family income can’t be computed.
- Per capita income takes into account only individual earnings of each household member.
Let’s compare these terms with the help of the following example:
Suppose that there is a family of three people – two spouses and their 13-year-old child. One spouse earns $57,000 per year, the other around $64,000. Separately, these numbers represent the spouses’ per capita incomes. Their household income is the sum of their earnings, or $121,000. Family income is the same, but it’s not always like that. Also, note that the kid is under the specified age of 15 for including his or her earnings (if there are some) in household income.
Average Household Income vs. Median Household Income
Besides the aforementioned terms, we need to state the difference between a median household income and an average household income. Sometimes, these incomes might be the same as in the example above, but they’re different in their essence:
- Median household income refers to the middle income within the group of household incomes.
- Average household income, as its name implies, refers to the average income, which can be computed by dividing of household income by the amount of household members.
The median income is considered to be more representative of the current economic situation in a country, while the average numbers might show a distorted picture of this situation. The average income always tends to be higher than the median one due to some huge household earnings, which influence on the whole picture.
For example, we have household incomes of $50,000, $55,000, $58,000, $60,000 and $70,000. For counting down the median income, we have to find income in the middle of this group:
$50,000, $55,000, $58,000, $60,000, $75,000
In order to calculate the average income, we have to sum up all the numbers and divide them by their amount:
($50,000 + $55,000 + $58,000 + $60,000 + $70,000) / 5 = $59,600
As a result, the median household income is $58,000, while the average income is $59,600. As you can see, the latter number is bigger than the first one because of one household in this group has a significantly greater income of $75,000.