How Do You Calculate Household Income? A Complete Guide

Knowing how to calculate household income is the first step toward creating a household budget.

Like personal budgeting, household budgeting must begin with an accurate measure of household income. But how do you calculate household income in a way that makes money management easy?

Households that want to build wealth must be able to answer this question. 

Wealth begins with savings, which is nothing but the difference between income and expenditure. Only households that know their income can create a budget and ensure that they spend less than they earn, thus building up savings and wealth. 

As we will see, a measurement of household income is also an important tool for the national government since it functions as a pointer to the standard of living in the country. 

In this article, we will consider how you can calculate household income and why it is important in personal finance management and national policymaking. We’ll consider:  

  1. What is household income?
  2. How do you calculate household income?
  3. How does household income differ from other income measures?
  4. Uses of household income
  5. How to get better at household budgeting

[Do you want to get better at sticking to your budget and meeting your savings goals? Sign up to Maly to control your spending with multiple debit cards and automate your savings.]

1. What is household income and how is it calculated?

Household income is the total income earned by the members of a household. 

What is a household?

In most instances, a household is a synonym for a family, which typically consists of parents and children. Some households also include extended family members like grandchildren, grandparents, uncles, aunts, nephews, nieces, cousins, etc. 

However, the definition of household cannot be restricted to people related by blood. There are many cases where two or more people unrelated by blood decide to live together. For example, single friends can decide to live together to save on rent payments. 

Consequently, we can define a household as a social unit of people living together

What is household income?

Household income is the cumulative income of all the members of a household

If a household consists of a father, a mother, and two teenage children, the household income is the sum of the incomes of the father and mother if we assume that the children do not earn an income. 

Suppose one of the children is an 18-year-old who is already working, then the household income is the sum of the incomes of the father, mother, and working child. 

If the household consists of non-family members, the same definition applies – total income of all the members of the household. 

In countries where individuals pay taxes (Personal Income Tax), household income is often described as the gross income or gross pay (what Americans call the adjusted gross income) of all income-earning members of the household. In UAE, where there is no PIT, using gross or net income makes no difference. 

2. How do you calculate household income? 

The first point to make is that income, as we are using it, is not limited to employment income (full-time or part-time employment). Other sources of income include self-employment, gig work, contract jobs, side hustles, and even investments

Household income also includes social security benefits or welfare payments like unemployment compensation and disability payments as well as retirement income. 

So, how do you calculate household income? You can do it in the following steps:

  1. Make a list of income-earning household members: Let’s assume a family of four members where the husband and the wife are the earners. 
  1. List all the income sources of every income-earning household member: We continue with our example and assume that the husband’s take-home pay from his full-time work is AED 10,000 per month and that he also earns an investment income of AED 2,000. Also, we assume that the wife has a small business that returns an average of AED 5,000 per month and a side hustle that brings in another AED 3,000. 
  1. Sum up the incomes of all income-earning household members: In our example, the husband’s income adds up to AED 12,000 while the wife’s adds up to AED 8,000. Consequently, the household income is AED 20,000.  

Whatever the structure of your household, the process is the same. 

3. How does household income differ from other income measures?

Let’s spend some time differentiating between household income and other common income measures:

Household income vs. family income

Typically, family income only covers households that are related by blood while household income includes all types of households, including those whose members are not blood related. 

Household income vs. per capita income

Per capita income is the total GDP (income method) of a country divided by its population. It is the average income earned by an individual citizen, irrespective of whether the individual is working or earning an income. 

In contrast, household income is the income earned by people who live together under one roof. 

4. Uses of household income

Money management

Calculating household income is often the first step toward creating a household budget. And budgeting is the first step in personal finance and money management. 

In this regard, we need to distinguish between different types of households and how they handle the budgeting process. 

The first type of household is the one where there is a household budget covering the needs and wants of all household members and where money saved is invested together.  

Just as all the incomes of household members are added together, their expenditures are also added together and subtracted from the household income. 

Such households are usually made up of family members. We’ll call this type of household the surplus-budget household. 

Let’s suppose that Lateef and Aminat have such a household. On one side of the household budget is AED 20,000 (the household monthly income). On the other side will be expenses incurred by Lateef, Aminat, and the two children. 

While there will be commonly incurred expenses like food, utilities, and health insurance, there will also be individual-specific items like the transport expenses of Lateef (or alimony payment to his former wife), Aminat’s hairdo and makeup kit, and the children’s textbooks. 

Sample budget of a budget-surplus household

The second type of household is the balanced-budget household and this structure is popular (though not limited to) where household members are not related by blood.

Here, the household creates a budget that only covers commonly incurred household expenses – rent, groceries, utility bills, etc. The cost of such expenses would then be shared among income-earning household members either equally or based on monthly income earned. 

Let’s clarify this with an example. 

Suppose Malik and Saheed are two fresh professionals who live together in Dubai. Since they are not family members, they only create a household budget that covers common household expenses. Assume that these add up to AED 20,000. They have both decided to split this 50:50 such that each person contributes AED 10,000 at the beginning of the month. 

In this case, Malik and Saheed will still have their individual budgets of which AED 10,000 will be part of the budgeted expenses.

While this structure is popular in non-family households, it is by no means absent in some family households.  

National policymaking

The average household income (total household income divided by the total number of households) or median household income (the household income level that divides the country into two halves) is a common measure of the standard of living of a country (although in this case, the focus is on annual household income). Consequently, it is also used to compare the economic performance of various countries. 

Governments can create policies to increase median or average household income. In some cases, the focus of government policies is to reduce income inequality and household income is also an important measure of inequality

Loan evaluation

Lenders will also use household income information to evaluate eligibility for a loan. This is especially common with home mortgages. 

5. How to get better at household budgeting

If you are a surplus-budget household, then you need to pay more attention to your household budget. If you don’t have one yet, the 50/30/20 rule is one simple budgeting system you can easily implement. 

This requires spending 50% of household income on household needs, 30% on wants, and the remaining 20% saved (and invested). 

Of course, creating a budget is the easier part; sticking to it and avoiding overspending is the harder task. 

Whether you are a surplus-budget or a balanced-budget household, you need a way to stick to your budget so you can attain your savings/investment goals. 

Sticking to your budget

But even this can be simpler with a solution like Maly’s multiple debit cards. If you have 7 expense categories, you can create a debit card for each category, load the card with the exact budgeted amount for that category, and then use each card for each expense category alone. 

Since these are debit cards, you can’t spend more than the amount preloaded. So, the only way you can overspend on entertainment, for example, is if you spend money from another card (which means spending less on that category). 

This method will “force” you to spend within your budget so you can save and invest towards your investment goals.  

Easier budget administration

When individuals create budgets, they are responsible for all expenses. But within a household, the person in charge of groceries might not be the one who handles utility bills, for example. 

Multiple debit cards also make the administrative part of executing a budget easier. A card can be created for groceries and handed over to the household member in charge while another card, from the same account, can be created for utilities and handed over to the one in charge. 

Automating savings

Surplus-budget households can also use Maly’s automated savings tool to improve money management. You can set up your account such that Maly will automatically debit your savings on the day you receive your paychecks (payday). 

As Warren Buffett advised, saving before spending will help you avoid overspending and meet your investment goals faster. 

Now that you have learned how to calculate household income, it is time to start preparing a household budget and saving toward household financial goals. 

[Do you want to improve your budgeting? Sign up with Maly to access tools like multiple debit cards and automated savings that will help you spend and avoid overspending.]


  • Household income is the amount of income earned by all the members of a household.
  • Incomes used in calculating household income include employment income, self-employment income, and welfare receipts, among others. 
  • Household income is used in household budgeting, national policy making, and loan evaluation by financial institutions. 
  • Sticking to a budget is more important than writing one. Tools like multiple debit cards and automated savings can help you better manage your money and achieve your savings goals. 
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