Overview:
The first installment of MSR's Youth Financial Education Series, sponsored by JPMorganChase, breaks down the difference between gross pay and net pay through the experience of student entrepreneur John Hannah, explaining why budgeting on take-home pay rather than gross earnings is the foundation of sound financial planning.
For many young people, the first paycheck is a moment of excitement, until they look a little closer and realize the number on the check is smaller than expected. That gap between what you earned and what you actually received is one of the most important financial lessons a young person can learn, and it starts with understanding two numbers: gross pay and net pay.
John Hannah, a student and entrepreneur who coaches track and field, learned this lesson firsthand. Managing revenue for his track and field program pushed him to take financial education seriously.
“Seeking financial education is inspired by my dual role as a student and an entrepreneur,” Hannah said. “Managing the revenue for my track and field course requires a solid understanding of money to ensure I can fund the things that I need.”
His biggest takeaway? The difference between gross pay and net pay, and why budgeting on the wrong number can lead to financial stress.
Gross pay is the total amount you earn before any deductions. It’s the number listed in your job offer, on your contract, or what you calculate when you multiply your hourly wage by hours worked. Net pay, sometimes called take-home pay, is what actually lands in your bank account after federal and state taxes, Social Security, Medicare, and any other deductions like health insurance or retirement contributions are taken out.
The difference between the two can be significant. Depending on your income level and deductions, your net pay could be 20% to 35% less than your gross pay. That means a young worker earning $15 an hour might take home closer to $10 to $12 per hour after deductions, a gap that catches many first-time earners off guard.
“Learning that budgeting must be based strictly on net pay, the amount actually deposited after taxes and deductions, is essential to prevent overspending and financial stress,” Hannah said.
It’s a lesson that applies whether you’re working a part-time job, freelancing, or running your own small business. For self-employed workers and entrepreneurs like Hannah, the stakes are even higher. Unlike traditional employees, self-employed individuals don’t have taxes automatically withheld from each payment. That means setting aside a portion of every dollar earned, typically 25% to 30%, to cover taxes at the end of the year.
Hannah said he now reviews both his business earnings and personal income through the lens of net take-home pay. “This knowledge improves my lifestyle by providing a clear, realistic picture of what I can actually afford to spend on my track and field recovery habits, my music interest, and my savings for the future,” he said.
That kind of intentional budgeting, starting with what you actually have, not what you earned on paper, is the foundation of sound financial planning. Financial educators recommend breaking take-home pay into three broad categories: needs (rent, food, transportation), wants (entertainment, hobbies, dining out), and savings. A common starting point is the 50/30/20 rule: 50% toward needs, 30% toward wants and 20% toward savings or debt repayment.
For Hannah, those categories include coaching expenses, music, and building toward a larger goal. “My ultimate financial goal is to build a sustainable business that provides financial freedom,” he said. “This would allow me to continue coaching athletes and pursuing my passion for track and field and music without being restricted by financial instability.”
That vision, moving from surviving to thriving, is exactly what financial education is designed to support. Hannah believes the benefits extend beyond individual households.
“When financial education is a priority, the community becomes more empowered and less vulnerable to financial errors,” he said. “Increased awareness leads to better long-term planning, more stable households and a stronger local economy as people move from surviving to thriving.”
The first step toward that future is simpler than it sounds: the next time a paycheck lands, look past the gross and focus on the net. Build your budget from there, and everything else follows.
This article is part of the Minnesota Spokesman-Recorder’s Youth Financial Education Series, a monthly initiative covering real-world financial milestones for young adults ages 18 to 25.