If you don’t know how to calculate your net monthly income, you won’t be able to figure out how to budget your money or take other important steps to keep your financial wellbeing in shape.
But what is a net income? How does it differ from gross income? Why does the difference even matter? Don’t worry, your friends at Academy are here to help you answer these questions so that you can begin to grow your wealth.
Net monthly income and gross income
Whether you want to calculate these figures for yourself, your business, or someone else, the concept remains the same.
Gross income refers to the total amount of money that you or your business make (before taxes and other obligations are subtracted from it).
For a business, you can calculate this figure by taking the total monthly revenue and subtracting the cost of the goods or services sold. For an individual, this number is calculated by combining all of your salaries and other sources of income (like alimony, investment dividends, side hustles, etc.). This number is important to keep in mind for tax season.
You can calculate your net monthly income by taking your gross income and subtracting all monthly costs from it — costs of products/services, taxes, administrative fees, etc. You will probably also have to subtract, state, local, and federal taxes from your gross income to calculate this number.
Why should I calculate my net monthly income?
Knowing your net monthly income is important for several reasons. For starters, you’ll have to report both your gross income and net income on taxes at year’s end in most countries.
Aside from tax considerations, you’ll have a clearer idea of how much money you have to dedicate to creating a spending plan. If you try to budget using your gross income, you’ll find yourself running out of money before the end of the month!
Once you’re able to create an accurate budget for yourself, you’ll also be able to figure out a plan to save and invest in a way that works for you.
3 easy steps to calculate your net income
Although the term might sound intimidating, it’s actually pretty easy to calculate your net monthly income. Follow these steps to get started.
1. Determine your gross monthly income
To do this, you’ll need to consider how often you’re paid (daily, weekly, bimonthly, etc.) and add together the value of all of your sources of income that you receive on a monthly basis.
Don’t forget to include your 9-5, side hustles, rental property income, dividends from investments, passive income, and any other income streams you may have.
2. Determine your monthly taxes or business expenses
To calculate your individual monthly net income, add together the total value of all of the taxes that come out of your earnings. For a business, add together taxes as well as the price of the goods or services you sell.
3. Subtract your monthly taxes/business expenses
When you subtract taxes from your total earnings, you’ll be left with just your monthly net income!
Calculating your net monthly income is key to the rest of your financial planning. Once you’ve taken that step, take a look at the rest of the FlexAcademy financial education library for ideas about how to boost your financial fitness!
