Future Business Leaders of America (FBLA) Personal Finance Practice Test

In personal finance, what does the term "net income" refer to?

1. Total earnings before expenses

2. Income after taxes and deductions

3. Income from investments only

4. Income received from direct deposit

The correct answer is: Income after taxes and deductions

Net income refers specifically to the amount of money an individual or business has remaining after all expenses, taxes, and deductions have been accounted for. This is the figure that most accurately represents the actual financial gain available for spending, saving, or investing. The reason income after taxes and deductions is the correct understanding is that it reflects the true earnings an individual can use in their personal budget. It's crucial for budgeting purposes as it indicates what is left for personal expenditures after legal and mandatory financial obligations have been met. In contrast, total earnings before expenses refers to gross income, which does not consider the reductions for taxes or expenses, and therefore does not reflect usable income. Income from investments only focuses on a narrow category of earnings and disregards other sources of income. Similarly, income received from direct deposit is simply a method of payment and doesn’t define the overall financial situation since it could consist of gross or net earnings, depending on what is being deposited.