Real Income

DEFINITION of 'Real Income'

The income of an individual or group after taking into consideration the effects of inflation on purchasing power. For example, if you received a 2% salary rise over the previous year and inflation for the year was 1%, then your real income only rose 1%. Conversely, if you received a 2% raise in salary and inflation stood at 3%, then your real income would have shrunk 1%.

Also known as "real wages".

BREAKING DOWN 'Real Income'

In other words, real income refers to the amount of goods and services you can buy today compared to the price of the same goods and services you could have purchased in another time period. For example, if it costs you $2,000 more to purchase the same amount of goods and services (i.e. food, gas, rent, utilities, interest, etc) this year compared to last year, and your annual income stayed the same, then your real income has actually decreased by $2,000.

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