Have you contemplated the path to financial freedom and wondered how to scale your finances effectively to no avail? Amidst various strategies to grow and manage income, a vital initial step is to calculate your gross monthly income.
Mastering the knowledge of your gross monthly income not only aids in managing your take-home pay but also serves as the grounds for evaluating and further enhancing your overall financial position.
This essential understanding of how you earn monthly becomes the basis for a journey leading to better financial management, increased income, and attaining your dreams for a better future.
In this article, we’ll cover gross monthly income, how to calculate it. And use your findings to build your financial goals.
What Is Gross Monthly Income?
For starters, gross monthly income refers to an individual’s complete monthly income before taxes and other mandatory deductions. In other words, it displays the total amount made directly from your agreed wage or salary for performing a job.
Consider Betty, a front desk executive, who receives a fixed monthly salary of $2000. In this scenario, her gross income is precisely $2000, reflecting the agreed-upon amount with her employer.
It is important to note that calculating gross income is not just a matter of analyzing the transactions available in one’s bank account. Bank transactions incorporate mandatory taxes and various charges, converting the gross income into a net income figure.
Therefore, you must also learn how to file your taxes to better understand what banks are up to with your hard-earned cash.
However, gross income calculation is not solely related to earnings from jobs or sources considered to be one’s primary source of income. It encompasses all sources of revenue. Beyond your principal salary, it includes allowances, bonuses, commissions, child support, social security benefits, investment returns, overtime, and any other inflow of funds into your accounts. So even for those wondering, “Do I have to pay taxes on my savings account,”
For example, imagine Betty earns $2000 per month from her job and generates an additional $1500 from a rental property. In this scenario, her gross monthly income totals $3500 before tax deductions.
From a broader perspective, gross monthly income includes every earning from your job, side hustles, and other revenue sources. You identify the various means by which you make money and sum them up to find your monthly gross income.
So you can understand why gross monthly income calculation is essential for financial planning. It serves as the starting point for your budgeting techniques, shedding more light on your earnings before any deduction.
Whether you’re evaluating your eligibility for a loan, negotiating a salary or wage for a new job, or asking for a raise. A clear understanding of gross income sets the tone for favorable financial decisions.
How To Calculate Your Gross Monthly Income
Annual Salary Procedure
Calculating salary figures is necessary for determining the gross monthly income using several methods, and one approach requires your annual income.
- Start by locating your annual salary, often detailed in your employment contract.
- Once you’ve identified this yearly amount, simply divide it by 12 (representing the months in a year) to find your monthly income.
For instance, let’s say your yearly income is $50,000. The calculation would be $50,000 divided by 12, resulting in a gross monthly earning of $4,166.67.
This method provides a straightforward route to break down your annual earnings into a more specific figure, clarifying your financial inflow every month.
Calculating your gross monthly income based on an hourly payment rate may seem tricky at first. But taking a step-by-step approach simplifies the process. Just follow the income calculation tips to help you navigate this method.
A Practical Scenario
Let’s further explain these steps with an example:
Take Nathan, a virtual assistant earning $24 per hour. If he works 25 hours a week, his weekly pay is:
$24/hour by 25 hours/week = $600
To determine his gross annual income, this weekly amount is multiplied by 52 weeks:
$600/week by 52 weeks/year = $31,200
To find Nathan’s gross monthly income, divide the figure you got for his annual gross annual income by 12 months:
$31,200 divided by 12 = $2,600
This method becomes very useful when individuals have multiple jobs. If Nathan, for instance, offers his services to three CEOs, he repeats the process for each job and then adds up the gross monthly income from each client to get his total monthly earnings.
For Nathan’s scenario with three income streams, he calculates the weekly income for each job separately, then determines the annual income for each position by multiplying the weekly income by 52 weeks. Finally, he adds the yearly revenues from all clients and divides the total by 12 to get his comprehensive gross income.
This method allows you to break down your income calculation, giving a comprehensive view of their earnings on both a weekly and monthly basis.
It is a valuable calculation for those with unstable work hours or different income streams, offering insight into their financial situation. Understanding and employing this approach empowers you to begin taking control of your personal finance calculations.
Gross Monthly Income For Business Owners
For business owners, gross monthly income refers to the total sales generated before subtracting costs, expenses, taxes, and other deductions. The gross income gives a framework for the overall revenue generated by a business, showing an overview of the business performance before tax payment.
Gross Monthly Income Versus Net Monthly Income
When discussing earnings and gross monthly income, we must also understand one crucial thing – net monthly income (take-home pay).
Finding your total paycheck only requires dividing your annual compensation by the number of times you are paid. However, you should deduct all necessary tax payments from the paycheck figure to get the take-home or net pay.
In short, It is all the money you earn before taking away anything. Net monthly income is the money left after you have paid passive income taxes and other deductions.
Imagine gross income as all the money you make and net income as the money you get to keep for yourself after paying for essentials like taxes, insurance, etc. Understanding both of these helps you see the bigger ‘financial’ picture.
Various deductions, unique to each individual, play a role in shaping net income. These mandatory contributions include but are not limited to retirement savings, life insurance, health insurance, and child support, among others. The authorities deduct these amounts before your net income hits your account.
The net monthly income becomes the money you get to spend on yourself and your needs, such as paying bills, groceries, vacation, etc.
Importance of Gross Monthly Income
Gross monthly income is vital for several reasons. Some of these include:
- Effective budgeting – helps you make profitable decisions about your money for the long and short term. You can better proceed with calculating income for budgeting needs, savings, and investing based on your overall earnings.
- Debt Management – It is also crucial for dealing with debts and documents like the Sworn Financial Statement (SFS). By understanding your gross income, you can create smart repayment plans to pay back any money you owe. This helps you manage your debts well and negotiate better loan terms.
- Salary Negotiations – Knowing your gross income is a significant advantage when looking for a new job or negotiating your salary during a job interview. It guides you on what to ask for and helps you steer your career in the right direction.
- Taxes – Even though apps can perform most tax calculations nowadays, knowing your gross income helps you understand what you owe in taxes and ensures you remain on the IRS’ good side. You can even compare these apps like Freetaxusa vs. Turbotax to find viable alternatives to Turbotax.
- Credit Cards – Lastly, when it comes to credit cards, your gross income plays a significant role. It helps decide how much you can spend and your credit limit. So, understanding your gross monthly income is like having a map for making good money choices.
Those with various income sources or irregular paychecks, such as freelancers and non-annual contract-based jobs, may find it challenging to figure out their exact monthly gross income due to unpredictable earnings.
To overcome the challenge of not getting your gross income right, you must first proceed by calculating earnings for each hour you work. And remember that mastering financial calculations takes time and practice. However, you may seek assistance from a certified financial expert since professional advice can provide valuable insight for managing challenges and ensure a better understanding of one’s gross monthly income.