Ask anyone this question, and you will more than likely get a different answer.
Depending on who you ask, it could be interpreted as everything before taxes, your salary minus deductions, or simply your paychecks summed up for the month. Regardless of how you define it, one thing is for sure: understanding your monthly income is a crucial step in understanding your overall financial health.
So, What is gross monthly income? And what exactly is included in this calculation?
Let us take a closer look at what goes into determining this income and why it matters. Stay tuned – I will also cover some tips on how to use this information to improve your financial circumstances.
Contents
- What Is Gross Monthly Income?
- What Should Be Included In Gross Monthly Income?
- The Importance Of Gross Monthly Income
- How To Calculate Your Gross Monthly Income
- The Difference Between Gross And Net Income
- Why Gross Income Is Vital?
- Info On Salaries And Working Hours
- What Is Gross Monthly Income? – Final Thoughts
What Is Gross Monthly Income?
Gross monthly income is your earnings before taxes, and other deductions are taken out. In other words, it is the total amount you earn in a month from all sources before anything is withheld. This includes salary, tips, commissions, self-employment income, interest, alimony, and other forms of regular earnings.
It is important to note that this is different from net monthly income, which is your earnings after taxes and other deductions have been taken out. Your net monthly income will always be lower than your gross monthly income since deductions are subtracted from the total.
What Should Be Included In Gross Monthly Income?
Okay, so what exactly should be included in this calculation? Here is a look at some of the most common sources of income that are typically used to calculate it:
- Salary: This is the amount you earn from your job every month before taxes, and other deductions are taken out.
- Tips: If you receive tips at your job, these can also be included as part of your monthly revenue.
- Commission: If you earn a commission at your job, this too can be included in your income calculation.
- Self-employment income: This is the amount you earn from any self-employment ventures, such as freelancing or running a small business.
- Interest: This is the amount of interest you earn on any investments, such as savings accounts, CDs, or bonds.
- Alimony: If you receive alimony payments from a former spouse, you should include this in your calculation.
- Other forms of regular earnings: This could include things like child support, disability payments, or veteran’s benefits.
As you can see, there are a variety of sources that can be used to calculate your gross monthly income. It is important to include all of these sources when determining your total, as this number will be used to calculate your eligibility for things like loans, credit cards, and other financial products.
The Importance Of Gross Monthly Income
So why is this part of your income important if it is not the final amount you take home? It is used to:
Determine your eligibility for financial products
As I just mentioned, your gross monthly income is often used to determine your eligibility for things like loans, credit cards, and other financial products. Lenders will use this number to decide how much money they are willing to lend you and at what interest rate.
Calculate your debt-to-income ratio
This ratio is used by lenders to decide how much debt you can afford to take on. It is calculated by taking your total monthly debt payments and dividing them by your gross monthly income. A higher ratio indicates that you are using a larger portion of your income to make debt payments, which could make it more difficult to qualify for new lines of credit.
Calculate your tax liability
Finally, it is used to determine how much money you owe in taxes. This number is also used to calculate things like social security and Medicare taxes.
How To Calculate Your Gross Monthly Income
It is now time to break out your calculator! To calculate your gross monthly income, you will need to add up all of your sources of income for the month or divide the yearly number by 12 (if you are paid yearly) to work out your monthly income.
Here are some examples:
If you earn an annual salary:
- $50,000 per year, your gross monthly income would be $4,166.67 ($50,000 / 12).
If you are paid per week, you will need to multiply the number by the number of weeks in the year:
- $1,000 per week, your calculation would be $1000 x 52(weeks in the year)/12= $4,333 per month.
If you are paid every two weeks, you will need to multiply your bi-weekly earnings by 26 and then divide by 12:
- $2,000 every two weeks, your gross monthly income calculation would be $2,000 x 26(weeks in the year)/12= $8,666 per month.
Now let us add some more income sources into the mix…
- If you earn a salary of $50,000 per year and you also receive $500 per month in interest from your savings account, the calculation would be $4,667 ($50,000 / 12 + $500).
If you have more than one extra income stream, the calculation will be the same; just include these extra incomes.
- For example, if you earn a salary of $50,000 per year and you receive $500 in interest from your savings account each month, but you also make $200 per week in tips, your gross monthly income would be $5,533 ($50,000 / 12 + $500 + $200 x 52(weeks in the year)/12).
The Difference Between Gross And Net Income
Gross income is defined as the amount of money you earn before taxes, and other deductions are taken out. Net income is the amount of money you take home after taxes, and other deductions have been taken out.
- For example, if you have a gross income of $5,000 per month but you owe $500 in taxes, your net income would be $4,500 ($5,000 – $500).
People often get confused between the two terms. It is important to remember that they are not the same thing. Your gross income is used to calculate things like your debt-to-income ratio and your tax liability, while your net income is the amount of money you actually have available to spend each month.
Why Gross Income Is Vital?
While knowing how much you make before taxes is important, it is more vital than you think for improving your net income. When it comes to salary negotiation and evaluating job offers, you will want to focus on this figure.
This is the number that will show your true value and potential to a company. It is also the number you will use to negotiate things like raises and bonuses. It can also be good to understand in case moving up your salary puts you in a higher tax bracket. You can then make adjustments to maintain your current net income.
Work out your retirement…
It is also important for retirement planning. Many financial advisors recommend using it over your net income as a starting point when estimating how much money you will need to save for retirement. This is because your gross income is a good indicator of your potential future earnings.
Info On Salaries And Working Hours
Not everyone is super savvy when it comes to their pay and taxes, so check out our thoughts on Gross Pay Vs Net Pay and Salary Vs Hourly Pay to decide on the best option, as well as How To Get A Pay Stub, or you might be wondering How Do I Convert Salary To Hourly To Calculate A Part Time Rate?
If you’re on the job hunt, then let’s start with the difference between Part Time And Full Time Hours, along with some Flexible Jobs That Let You Set Your Own Hours, or 15 Part Time Jobs That Pay More Than 40 Per Hour and 20 Part Time Jobs That Pay More Than 20 Per Hour, and finally, the Top Easy Jobs That Pay Well in 2023.
You might also want to know How To Answer Desired Salary, What Are Your Salary Expectations, and How To Counteroffer Your Salary After A Job Offer for your next all-important interview!
What Is Gross Monthly Income? – Final Thoughts
Now that you know your gross monthly income, it is time to put this information to use! Use our calculator to figure out your revenue. Then use this number to budget, save, and plan for your future.
So, what are you waiting for? Get started today!
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