Gross Monthly Income is the amount of money a person earns in a month before any deductions or taxes are taken out. This includes all forms of income, such as wages, salaries, bonuses, and self-employment income. It measures an individual’s earning capacity before any expenses or taxes are considered. It’s the total money earned during the month, regardless of salary, wages, or any other kind of earning.
Income refers to the money an individual or household receives from various sources, such as wages and salaries, investments, and other forms of compensation. It is used to measure financial well-being and often to determine poverty levels and income inequality. Income can come in different forms: earned income, investment income, passive income, pension income, capital gains, and business income. It can also be measured on different time frames, like annual, monthly, weekly, or even hourly.
For a business, income is the profit earned after subtracting all expenses from revenue. This is also known as net income.
How to Calculate Monthly Income?
To calculate your monthly income, you add up all of your sources of income for a month and then sum them up. The sources of income can include:
- Salary or wages: The amount you earn from your job or business.
- Investment income: Interest, dividends, and capital gains from investments
- Rental Income: Money earned from renting out a property.
- Pension or retirement income: Money from retirement plans or government programs such as Social Security.
- Business income: Revenue earned by a business, which a self-employed individual, partnership, or corporation can earn.
- Any other form of income you might receive, such as child support, alimony, unemployment benefits, etc.
To calculate your monthly income, you would add up all of these sources of income and then divide the total by the number of months or 12 to get your monthly income.
For example, if you have a salary of $6,000 per month and a rental income of $1,000 per month, your monthly income would be $7,000 ($6,000 + $1,000).
What Does Annual Income Mean?
Annual income is the money an individual or household earns in a year, including wages, salaries, bonuses, investments, and other compensation forms. It measures an individual or household’s financial well-being and is often used to determine poverty levels and income inequality.
For an individual, annual income includes all sources of income, such as salary, wages, bonuses, rental income, interest income, capital gains, and other forms of income. It is the total amount calculated by adding up all the sources of income for a year, including all forms of compensation, bonuses, and any other forms of payment received.
For a business, annual income is calculated by adding up all the revenue for a year and subtracting all the expenses to arrive at the net income.
Annual income can also be used to calculate tax liability; for example, in the US, there are several tax brackets, and each bracket has a different tax rate; depending on the individual or household’s annual income, they will fall into a certain bracket and pay taxes at that rate.
Types of Income
There are several different types of income, including:
- Earned income, which is income earned through employment or self-employment, such as wages, salaries, and tips.
- Investment income is money earned from investments in stocks, bonds, and real estate, as well as rental income.
- Passive income is income that is earned without actively working for it, such as rental income, dividends from stocks, and interest from savings accounts.
- Pension income is income received from retirement plans or government programs like Social Security.
- Capital gains are the profit realized when selling a capital asset, such as a stock or real estate.
- Business income, which is the revenue earned by a business, can be earned by a self-employed individual, partnership, or corporation.
The type and mix of income can vary depending on an individual’s occupation, investment choices, and other factors.
What is Household Income?
Household income is the total income earned by all household members, including wages, salaries, investment income, and other forms of compensation. It measures a household’s financial well-being and is often used to determine poverty levels and income inequality at the household level.
Household income is typically calculated by adding up the income of all working adult household members and then adding other forms of income such as investment income, rental income, and government transfers like welfare or unemployment benefits. It can be measured annually, monthly, or at any other time.
It’s important to note that household income is different from per capita income which is calculated by dividing total household income by the number of people in the household.
Revenue vs. Income
Revenue and income are related but distinct financial terms.
Revenue is the money a business or organization brings in from its sales or services before any expenses are considered. It is a measure of the sales or services provided by a business.
On the other hand, income is the money left over after all expenses have been subtracted from revenue. It is a measure of a business’s profitability. So, Income = Revenue – Expenses, it’s a net amount after all the costs and expenses have been subtracted.
In simpler terms, revenue is the top-line number, and income is the bottom-line number. Revenue is what a company earns, while income is what it keeps after all expenses are paid.
For an individual, revenue is the same as gross income, and income is the same as net income.
Income vs Net Worth
Income refers to the money a person earns from various sources, such as employment or other sources, on a regular basis. Net worth, on the other hand, is a measure of a person’s financial health and is calculated by subtracting liabilities (debt schedule) from assets (property, investments, cash, etc.). Net worth is a snapshot of a person’s financial situation, or personal financial statement, at a particular point in time, while income is a measure of a person’s earning power over a period of time.
What is Unearned Income?
Unearned income refers to money that is received without the need for active work or labor. It includes income from sources such as investments, rental properties, and government benefits.
Examples of unearned Income include:
- Interest earned on savings accounts, certificates of deposit (CDs), and bonds
- Dividends from stocks
- Rental Income
- Capital gains from the sale of property or investments
- Pension and Social Security benefits
- Unemployment benefits
- Child support and alimony
- Royalties from intellectual property
Unearned income is considered to be passive income, as it is received without the need for active work or labor. It is typically taxed at the individual’s marginal tax rate, depending on the country or state tax laws.
It is important to note that unearned income is different from earned income, which is income from wages, salaries, and self-employment, and it is subject to different tax rules and regulations.
For example, in the US, unearned income is subject to the 3.8% net investment income tax (NIIT) if an individual’s modified adjusted gross Income (MAGI) exceeds a certain threshold. In contrast, earned income is subject to payroll taxes, such as Social Security and Medicare.
Interest income refers to the money earned from interest on savings accounts, certificates of deposit (CDs), bonds, and other fixed-income investments. Interest is usually paid at regular intervals, such as monthly or annually, and can be either fixed or variable.
Interest income is considered a form of passive income, as it is earned without the need for active work or labor. It can be a stable and predictable source of income for individuals looking for a way to earn money without having to work for it.
Interest income is typically taxed at the individual’s marginal tax rate, depending on the country or state tax laws. Interest from the savings account, bonds, and CDs are taxed as ordinary income, while interest from municipal bonds may be tax-free at the federal level but taxed at the state level. It’s essential to keep track of interest income, as it must be reported on tax returns.
Net Interest Income
Net interest income is the difference between the interest earned on a financial institution’s assets and the interest paid on its liabilities (such as deposits and borrowings). It is a key metric for measuring the profitability of a financial institution such as a bank.
Net interest income is calculated by subtracting the interest expense (the cost of funds) from the interest income (the revenue from lending or investing). Interest income is the amount of money a bank earns from loans and investments, and interest expense is the amount that a bank pays to depositors or other creditors.
For example, if a bank earns $100 in interest income from loans and investments and pays $50 in interest expense to depositors, its net interest income would be $50.
Net interest income is an important metric for banks and other financial institutions because it is a significant source of revenue. Banks use their net interest income to cover operating costs and generate profits. It is also an important measure of the bank’s liquidity, solvency, and ability to generate income.
Net Interest margin (NIM) is also an important metric that can be derived from net interest income; NIM is the ratio of net interest income to the bank’s average earning assets. It is a measure of the bank’s efficiency in generating income, a higher NIM indicates that the bank is generating more income for each dollar of assets.