How to Calculate Gross Income for Better Financial Planning

Knowing one’s gross income is a crucial aspect of an individual’s personal finance. It allows you to utilize the information in situations that will help you to prove financial capacity and secure growth opportunities. That’s why you need to know how to calculate gross income.

What is gross income?

For an individual, gross income or gross pay refers to the salary before the taxes and other necessary deductions. This is the starting point for other calculations that may incur before you arrive at your net income. These other calculations include overtime pay, federal and state taxes, FICA taxes, withholding taxes, and employee deductions and benefits. 

An individual gross income may also include interest income, rental income, investments, savings, and more types of income that add to their financial worth at a given period. For instance, a person should include stock dividends in the calculation of gross income. 

Why should you know how to calculate your gross income?

An individual’s gross income plays a significant role in defining your financial power. It shows your overall financial health, which may help you get approvals for loans. 

If you plan to loan, the lenders will need to see your gross income to assess how worthy you are as a borrower. This entails that you have to meet a certain standard to take out a loan. 

Also, knowing your gross income will help you design more effective financial planning. Having an awareness of how much you earn monthly enables you to develop a more strategic plot on how you can better handle your finances.

How to calculate gross monthly income

You must consider two situations when calculating your gross income—when you are paid annually or hourly. 

1. How to calculate gross monthly income when you receive an annual salary

Computing your gross monthly income when you are paid annually is relatively easy. You just have to divide your annual salary by the 12 months of the year. This is pretty easy since your gross pay doesn’t include deductions and taxes. 

The formula looks like this: 

Gross monthly income = Annual salary / 12 

To illustrate, if you earn $60,000 annually, the computation would look like: 

$60,000 / 12 = $5,000 is the gross salary for the month. 

2. How to calculate gross monthly income when you are paid hourly

When you are paid hourly, the computation is a tad bit complicated. You will need to identify your yearly pay by multiplying your hourly wage by the number of working hours a week and multiplying the total by 52. Then, divide this by 12 to arrive at the monthly income. 

To make it simple, here’s the formula to get the gross monthly income when paid hourly: 

Gross monthly income = (hourly pay) x (hours per week x 52) / 12 

If the working hours vary per week, use the best estimate of the average number of working hours. 

To illustrate, if your hourly rate is $20 and you work 40 hours a week, your weekly gross pay is $800. Multiply this by 52, and your annual gross income will be $41,600. Divide this by 12, and you will arrive at your gross monthly pay of $3,466.67. 

$20 x (40 x 52) / 12 = $3,466.67 is the gross monthly income

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How to calculate gross annual income when you have other income outlets

Here’s an example of how you can calculate gross income when you have different income outlets aside from your salaries.

Assume that you have gross wages amounting to $80,000, a rental income from real estate properties of $60,000, dividend shares of $40,000, and $10,000 income from savings accounts. Add all these up to get your annual gross income. 

$80,000 + $60,000 + $40,000 + $10,000 = $190,000 is the gross annual income.

If you wish to calculate the monthly gross income, divide the gross annual income by 12 months. 

That would look like this: 

$190,000 / 12 = $15,833.33 is the gross monthly income

That’s how easy it is to compute your gross income—for any reason you may have. Knowing what your gross income is handy in fulfilling your financial plans. After all, your individual financial awareness will pave the way for financial freedom.

Need more lessons on how you can better handle finances? Here are some well-recommended Skill Success courses for you:

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