Although the word “gross monthly income” may sound like some obscure accounting term, it’s actually a straightforward figure with significant ramifications.
Knowing that number is crucial when applying for a loan, credit card, or any other type of credit.
Lenders may inquire. The prospective partner can inquire if you’re thinking about forming a business partnership. Even during a first date, though it can sound rude, the question might be raised.
A lender may request information on a household’s gross monthly income, which often refers to both you and your spouse’s salary.
Here are the details and the significance of it.
What Is Monthly Gross Income?
The term “gross” in the financial industry refers to the complete sum before any deductions. Therefore, the gross income is $1 million before taxes, payroll, and other business expenses, for instance, if a company sells $1 million worth of goods.
Simple, yes?
The same holds true for people. Gross monthly revenue is the sum of all income received from:
- Salary
- Income from a side job or business
- Commissions, bonuses, or overtime
- Interest-bearing Investments
- Child support obligations
- Government help
- Disability benefits and Social Security
The simplest method to determine gross monthly income is to divide the total amount earned or received in a year by twelve.
This average figure is especially useful when varied amounts of revenue may be generated each month from certain sources, such as bonuses or side jobs (or some months, none at all).
Remember that only cash and cash equivalents are mentioned when lenders and other financial institutions inquire about your gross monthly income.
The Supplemental Nutrition Assistance Program (SNAP) and other non-financial benefits offered by public and commercial programs are excluded. Additionally, your employer cannot contribute to your 401(k) with matching funds or a Health Savings Account (HSA) with money (k).
Why Is Monthly Gross Income Important?
Whether it’s a mortgage, the regular payment for a new cell phone, or a loan, anyone granting credit wants reassurance that you’ll be able to meet your responsibility. They will examine your credit score to see whether you are a good risk or not. However, a credit score won’t reveal your income level.
Lenders generally prefer that your total monthly debt payments—including your mortgage and other loans—do not exceed 36% of your gross monthly income and 28% of your gross monthly income, respectively.
While some lenders might be ready to go beyond such restrictions, they might do so at a higher interest rate. This is one reason it would be a good idea to pay off other bills before applying for a mortgage, such as credit card debt and auto loans.
Even if you don’t intend to apply for a loan anytime soon, knowing your gross monthly income might be useful because it can reveal the state of your finances.
Monthly Gross Income and Financial Situation
One of the two numbers you need to determine your debt-to-income ratio is your gross monthly income (DTI).
DTI stands for debt-to-income ratio and refers to the proportion of your income that is used to pay off debt.
Your DTI, for instance, would be 33% if your total monthly income was $6,000 and you paid $2,000 each month toward your obligations (mortgage, auto loan, credit cards, and other loans).
This % is typically seen as a manageable level of debt, and after paying all your payments, you’ll probably have some money left over.
Your DTI rises to 50% if your monthly loan payments total $3,000, though. This could not be enough to support a comfortable lifestyle.
Obviously, the better, the lower your DTI. DTI that is too high makes it harder to pay for all of life’s expenses, and creditors could be hesitant to extend credit.
Comparison of gross and net monthly income
After federal and state income taxes, Social Security/Medicare, health insurance, and retirement contributions have been deducted, your net monthly income is the amount really in your pocket (or bank account).
If your paycheck is your only source of income, your net monthly income is the sum that your company actually deposits into your bank account each month.
How Monthly Gross Income Influences Financial Decisions
Knowing your gross monthly income is essential for creating a budget, determining your tax obligations, deciding how much money to set aside for retirement, and making a number of other financial decisions. When applying for a loan or renting an apartment, you must know this number.
Your monthly gross income can be used as a starting point by a CFP® Professional at Facet Wealth to assist you in making better financial decisions.
To take the first step in enhancing your future freedom and financial security, schedule a free introductory conversation right away.
