"Gross monthly income" might sound like a dry accounting term you'd rather ignore, but it's actually a simple number with huge consequences for your life. Lenders will ask for it when you apply for a loan, and potential business partners will want to see it too. While it might feel intrusive, like a question that comes up on a bold first date, understanding this number is the first step toward taking control of your financial journey.
What is gross monthly income?
In the financial world, "gross" simply means the total amount before any deductions are taken out. Think of it like a business scenario. If a company sells $1 million worth of products, their gross revenue is that full $1 million before they pay taxes, salaries, or other expenses. It's the same for you.
Your gross monthly income is all the money you earn from:
- Salary
- Income from a second job or side hustle
- Overtime, bonuses, or commissions
- Investments and interest
- Child support payments
- Public assistance
- Social Security and disability payments
In a household, a lender may ask for the gross household monthly income, which generally means the combined income of you and your spouse.
How to calculate your number
The easiest way to figure this out is to take all the money you earn or receive in a year and divide that amount by twelve. This average is incredibly helpful because some income sources, like bonuses or side hustles, might fluctuate from month to month, or some months, none at all.
There is one important caveat here. When lenders ask for this number, they are usually only interested in cash and cash equivalents. You should not include government or private programs that provide non-monetary benefits, such as the Supplemental Nutrition Assistance Program (SNAP). You also shouldn't include money your employer deposits into a Health Savings Account (HSA) or matching funds they deposit into your 401(k).
Why lenders care about this number
Anyone extending credit to you wants assurance that you can handle the obligation, whether it's a mortgage, the monthly payment for a new cell phone, or a loan. They will look at your credit score to see if you're a good risk, but that score doesn't tell them how much cash you actually bring in.
Lenders generally use specific "rules of thumb" to decide if you can afford a loan:
- Housing: They generally don't want your mortgage payments to exceed 28% of your gross monthly income.
- Total debt: They don't want your total debt payments (including the mortgage, credit cards, and other loans) to exceed 36% of this number.
Can you go over these limits? Sometimes. Some lenders might be willing to exceed those percentages, but they may charge you a higher interest rate to offset the risk. This is why it's often smart to pay down other debts, like auto loans or credit cards, before you apply for a big mortgage.
Understanding your financial health and DTI
Even if you aren't applying for a loan today, knowing your gross monthly income is vital for checking your financial vitals. It is one of the two numbers required to calculate your debt-to-income ratio (DTI).
Your DTI is exactly what it sounds like. It's the percentage of your income that goes toward paying your debts. Here is how the math works in real life:
The comfortable scenario
Imagine your gross monthly income is $6,000. If you pay $2,000 every month toward debts (like your mortgage, car, and cards), your DTI is 33%. This is generally considered a comfortable amount of debt to manage, and you'll likely have money left over for other life expenses.
The challenging scenario
Now, imagine that same $6,000 income, but your debt payments are $3,000. In this case, your DTI shoots up to 50%. When half your income is committed to debt, it becomes much harder to live comfortably or handle unexpected expenses.
Obviously, the lower your DTI, the better. When that ratio gets too high, lenders become reluctant to extend credit, and your daily budget gets tighter.
The difference between gross and net income
It is important not to confuse gross income with net monthly income. Net income is the actual amount that lands in your pocket or bank account. It's what is left after federal and state taxes, Social Security, Medicare, health insurance, and retirement contributions are deducted.
If your only income is a standard paycheck, your net monthly income is simply the specific dollar amount your employer deposits into your account each month.
Knowing your gross monthly income is critical for formulating a budget, calculating tax liabilities, and choosing a percentage to invest for retirement. It's a number you have to know when applying for a loan or renting an apartment.
The Facet difference
At Facet, we believe your financial value is defined by more than just your gross monthly income or your debt-to-income ratio. While these numbers are critical data points, they are just parts of a larger story. You'll work with a CFP® professional who looks at your entire life: your career, your family goals, and your values.
We don't charge based on how much money you make or have saved. Instead, we offer a flat membership fee that gives you access to objective, fiduciary advice. We're here to help you build a comprehensive financial roadmap that turns metrics like gross income into actionable steps toward the life you want to live.
