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My salary is $900 after taxes. This is quite a large salary for my country. And when my parents found out about it, they said that I earn a lot.

But in my opinion it is not so, because in order to do my job, it is necessary pay:

  • 100 for personal care items and clothing
  • 50 for fast food, because I don't have time to cook food by myself
  • 20 for gasoline for my car

I can't refuse these extra costs, because then it will be harder for me to do this job. According to my calculations, my real salary is: 900-100-50-20 = 730$. I can spend this money as I wish, so I consider it my real salary. But my father said that since I use all these things - food, gasoline and clothes, it is still my income.

Who is right?

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2 Answers 2

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Real salary is salary adjusted for inflation. If you are not comparing salary over time then current salary is also real salary since you are not comparing two salaries over time.

Hence your real salary is 900. The fact that you consider the spending on clothes, food and gasoline non-discretionary does not affect your real salary.

You can use the expenses as a justification for argument "my salary is not large". Economically speaking there is no definition of large salary. For someone, below average salary might be large for someone else being in top 10% might not be large enough, but level of your non-discretionary expenses do not determine your real salary.

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    $\begingroup$ Thank you very much for your reply! Can you provide a formula by which I could calculate my real salary, taking into account inflation? $\endgroup$
    – Tamila Ambeon
    Commented Jan 19, 2023 at 13:20
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    $\begingroup$ @TamilaAmbeon you can take salaries from 2 separate years, (again within single time period nominal salary is the real salary). For example you could have $w_{2001}$ and $w_{2002}$ where $w$ is your salary. Then find CPI data. CPI data will have some base year that is different from your base year so rebase CPI using $CPI_t/CPI_{\text{your base year}}$. For example if you want to compare the 2002 relative to 2001 in real terms pick 2001 as base. then take the new rebased CPI and divide you $w_{2002}$ by new rebased CPI and then you can compare $w_{2001}$ and $w_{2002}$ in real terms $\endgroup$
    – 1muflon1 ♦
    Commented Jan 19, 2023 at 14:12
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As @1muflon1 said in his answer, the term real income is used in economics to denote your income after adjusting for inflation and is only useful if you compare incomes over time. That's probably not what you are talking about.

Since you already deducted taxes (and maybe social security charges) from your gross income, in economics terms your salary of \$900 is your net income or disposable income. If you subtract payments for necessities like housing, clothing, food, and gasoline, then what is left over, \$730 in your case, is called your discretionary income. That's basically what you can spend or save after having subtracted all expenses necessary to survive and keep your job.

Since what you earn usually means your net income, your father is right in saying that you "earn a lot", given that you admit that your salary is a "large" salary. "Large" can of course be understood only in relative terms, so I guess you mean that your net income is considerably above some average or median in your country.

However, the costs of necessities should not differ too much between individuals except under special circumstances like if you live with your parents and therefore have no expenses for housing (since you didn't mention these expenses). This would imply that if your net income is "large", then also your discretionary income should be "large". (And in case you have no housing expenses this should be even more true.) Thus, it's not clear why you say "it is not so", referring to your calculation of your discretionary income.

In case you are comparing your discretionary income with your country's average net income, this would simply be a meaningless comparison. You should of course compare it to your country's average discretionary income.

So given the explicit and implicit information in your question I'd say your father is right.

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  • $\begingroup$ Thanks! U gave me more insight! My housing rent is ~400 with bills. I did not deduct it from my salary, because I consider it my own choice. I could live with my parents, or rent a cheaper place. But I can't give up gasoline, because then I won't be able to get to work. It is also impossible to work without clothes and food. From your explanation, my discretionary income income is: 730 - 400 = 330$. Lets say that average discretionary income in my country is 500. I don't know for sure, just my guess. Maybe that's why I feel that my income is not high? Can you explain this? $\endgroup$
    – Tamila Ambeon
    Commented Jan 20, 2023 at 11:00
  • $\begingroup$ @TamilaAmbeon, not really. Because, as I said, if your total expenses for necessities are \$570, then these should also be roughly the same for others in your country. Then if average discretionary income were \$500 in your country, average net income (salary) should be above \$1000. But this seems inconsistent with you saying that your \$900 salary, which would then be below average, is "quite a large salary" in your country... $\endgroup$
    – VARulle
    Commented Jan 20, 2023 at 13:10

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