Gross Monthly Income
Gross monthly income is the total amount of income that an individual or business receives within a month. This income is calculated before deductions for taxes, mandatory insurance contributions, pension account payments, and other withholdings. Therefore, the actual income amount differs from the gross monthly income. It is crucial to consider this aspect when budgeting and assessing an individual or company’s real financial situation.
What Sources of Income Are Included in Gross Monthly Income?
Gross monthly income comprises all funds received from various sources, including salary (annual salary divided by 12, or, in the case of hourly wages, the hourly rate multiplied by the number of hours worked in a month). If an individual receives bonuses, commissions, and other variable incomes that may not be consistent every month, these are still added to the gross monthly income for that particular month. This also applies to overtime pay, rental income, dividends from investments, side jobs, alimony, royalties, and other monetary receipts.
Why Is Knowing Your Gross Monthly Income Important?
Knowing your gross monthly income makes it much easier to create a detailed monthly budget and understand how much money can be spent and saved. It is also essential for proper and effective financial planning, covering long-term goals such as purchasing a new car or home, planning vacations, or education. However, gross monthly income is primarily calculated by banking institutions to assess a client’s real financial situation and mathematically determine the maximum possible amount for issuing a loan for specific needs or opening a credit card with a certain limit. This figure also affects loan conditions, as more responsible, reliable, and solvent clients can expect better terms.
How Is Gross Monthly Income Calculated?
The calculation method depends on the predominant types of income a person receives monthly. For salaried employees, this figure is typically the total annual salary divided by 12. However, documents can be provided to confirm the regularity of additional monthly receipts and increase this figure.
For example:
Annual salary: $56,000
Bonuses: $4,000 annually
Gross monthly income: $56,000/12 + $4,000/12 = $5,000
Net monthly income is the difference between gross monthly income and expenses. Typical expense items include taxes, insurance, alimony, pension contributions, and other deductions (union dues, garnishments, charity, etc.).
For example:
Monthly deductions amount: $1,500
Net Monthly Income: $5,000-$1,500 = $3,500
Thus, a bank may offer a credit limit to its client based on the $5,000 the client has monthly in total, but, in fact, the client has $3,500. Understanding this is important to manage credit funds wisely, avoid unnecessary usage, and not fully deplete credit cards. Misunderstanding the difference between actual (net) and nominal (gross) income leads to most financial difficulties that anyone can face. However, knowing these pitfalls allows for more effective planning of income and expenses, setting realistic financial goals, and taking only those financial obligations that can be realistically managed.