What is gross monthly income? Why is it important? Wealth facet

“Gross monthly income” may sound like some kind of edgy accounting term, but it’s actually a simple number with very far-reaching consequences.

To apply for a loan, a credit card or any other form of credit, it is important to know this number.

Lenders will ask. If you are considering a business partnership, the potential partner may ask. Although it may seem rude, it is possible for the question to come up even on a first date.

In a household, a lender may ask for the gross monthly household income, which usually means your income and that of your spouse.

Here’s what it is and why it matters.

What is gross monthly income?

In the financial world, “gross” means the total amount before any deductions. So, for example, if a company sells $1 million worth of products, the gross revenue is $1 million before taxes, salaries, and other business expenses.

Simple, right?

The same is true for individuals. Gross monthly income is all money earned from:

  • Salary
  • Income from a second job or a secondary activity
  • Overtime, bonuses or commissions
  • Investments and interests
  • Child support
  • Public assistance
  • Social security and disability benefits

The easiest way to calculate gross monthly income is to take all the money earned or received in a year and divide that amount by twelve.

This average amount is especially useful when certain sources of income, such as bonuses or odd jobs, may produce different income each month (or some months, not at all).

Keep in mind that when lenders and financial institutions ask for gross monthly income, they are only asking for cash and cash equivalents.

Government and private programs that provide non-monetary benefits, such as the Supplemental Nutrition Assistance Program (SNAP), are not included. There is also no money your employer can deposit into a Health Savings Account (HSA) or matching funds deposited into your (401(k).

Why is gross monthly income important?

Anyone who extends credit wants to know that you’ll be able to pay your obligation, whether it’s a mortgage, the monthly payment for a new cell phone, or a loan. They will analyze your credit score, which will tell them if you are a good risk. But a credit score won’t tell them how much money you make.

Generally, lenders don’t want your mortgage payments to exceed 28% of your gross monthly income and your total debt payments (including mortgages and other loans) to exceed 36% of your gross monthly income.

Some lenders may be willing to exceed these limits, but may charge a higher interest rate. This is one reason why it may be a good idea to pay off other debts, such as credit cards and car loans, before applying for a mortgage.

Knowing your gross monthly income can also be useful even if you don’t plan to apply for a loan anytime soon, as it can help determine your financial health.

Gross monthly income and financial health

Gross monthly income is one of two numbers you need to calculate your debt-to-income ratio (DTI).

DTI is exactly what it sounds like: the percentage of your income that goes to paying off your debts.

For example, if your gross monthly income is $6,000 and you pay $2,000 a month on your debts (mortgage, car loan, credit cards, other loans), your DTI is 33%.

This percentage is generally considered a comfortable amount of debt to manage, and you’ll likely have some money left over after paying all your bills.

However, if your debt payments amount to $3,000, your DTI goes up to 50%. It may not be enough money to live comfortably.

Obviously, the lower your DTI, the better. Once the DTI gets too high, it becomes more difficult to pay all of life’s expenses and lenders may be reluctant to spend credit.

Gross Monthly Income vs Net Monthly Income

Net monthly income is the actual amount in your pocket (or bank account) after deductions: federal and state income taxes, Social Security/Medicare, health insurance, and retirement.

If your only income is your paycheck, your net monthly income is the amount actually deposited into your bank account by your employer each month.

How Gross Monthly Income Determines Financial Decisions

Knowing your gross monthly income is essential for establishing a budget, calculating tax obligations, choosing a percentage to invest for retirement and many other financial decisions. This is a number you need to know when applying for a loan or renting an apartment.

A CFP® professional at Facet Wealth can help you use your gross monthly income as a starting point for more informed financial decision-making.

Schedule a free introductory call today to take your first step towards greater financial security and independence for your future

Facet Wealth, Inc. is an SEC-registered investment adviser headquartered in Baltimore, Maryland. This is not an offer to sell securities or a solicitation of an offer to buy securities. It is not investment, financial, legal or tax advice. Past performance is no guarantee of future performance.