What is annual income & what percentage of annual income should go to rent?

Whatever you earn from various sources in a year, makes up your annual income. For instance, if you have a property in some other state and you are receiving rental on it, then apart from your salary (if you are employed), or profit (if you own a business), that rental income will  be considered as your annual income. However, if you have multiple sources of income and you are looking for an answer to what is annual income, then the simplest way to calculate it, is to add all the income that you generate in a year. It must include all of your income sources.

So far we have covered the basics of what is annual income. Now, let’s consider one of the key aspects of yearly income i.e. what percentage of annual income should go on rent? Before you opt to rent any property, the most important factor is to determine the amount of rent, which you can afford. Moreover, It is also vital to keep your current income and financial liabilities in mind. If you are not sure about your financial liabilities, then you probably end up shooting your budget.

To know more about the annual income and why it is important to calculate the rental ability before you borrow or lend any property, you will find this article helpful in both regards.

What is annual income for businesses?

As explained above, the annual income is referred to the money that you earn within a year. Depending on the required data to determine your annual income – you can calculate your annual income through a calendar or fiscal year.

Business owners and professionals determine the annual income depending on the circumstances and the requirements that have been asked for. The majority, in this case, calculates the amount of annual income based on the fiscal year. However, for business owners calculating annual income is a bit more tedious and painstaking process then what is defined above. You have to take into account your assets, liabilities, the revenue you generate and the profit you make after tax deductions. 


Annual income calculation 

You may find it easy to calculate the annual income doing some simple math, while other calculations may need some extra effort. If you have just switched your workplace, then  you will have to work your way throughout the year to determine the annual income.

You can follow these steps to calculate your annual income:

  • Jot down the income sources
  • Calculate the yearly earning
  • Calculate the monthly earning
  • Calculate the hourly earning 
  • Calculate the final annual income

Jot down the income sources

List down all the income types that you are earning – also make sure to add the total amount that you are receiving from all the resources.

Calculate the yearly earning

Gather all the history of all the income that you have earned throughout the year. For instance, if you have received  $10,000 for child support, earned $1,000 for the capital gain, and $500 as an interest payment, then you must add them together to get the full amount, that will be $25,000 as yearly earnings, in this scenario..

Calculate the monthly earning

Following the calculation, you may receive some payments that may not continue throughout the year. In this matter, you can calculate your monthly income by multiplying your month’s income with 12. The answer that you will get, would be , if you would have received the same payment each month for the whole year.

Calculate the hourly earning 

In cases, where you have started working at hourly wage – that began before a month, then the calculations would be done according to the weekly or hourly wage. You will have to get at least one  paycheck  to calculate your hourly wage. Make the notes of your hourly income that will show you your net hourly income. Add the hours that you have worked and divide them from the payment you received.

Calculate the final annual income

Finally add up all your hourly, monthly, and yearly income to calculate your annual income.

Now you have the calculated annual amount against your current income. You are now able to estimate the total amount that you would be happy to give as rent. But first, you have to consider and analyze few things before you search for the rental option. Such as:

  • Situation Analysis
  • Estimation of utilities, and
  • Calculate monthly rent

Situation analysis

It is not necessary that you live alone in the rental property – and not necessarily you are married. Analyze your requirements and your living situation. In case, you plan to live alone, then 1 BHK property would be enough for you. However, if you are sharing it with your friend or family, then you may need an apartment bigger than that. Basically, you should rent the property depending on your needs. If you have a small family with kids and you are concerned about the crime rate in the neighborhood and the available education facilities, then you may have to rent a home or apartment in some posh area which is going to be costly. But for this, you need to determine whether your income allows it or not.

Estimation of utilities

 Having realistically explored your situation, you need to consider the utility bills that you have to incur – which again depends on the headcount in the household as well as your requirements. For instance, if you live in a state which gets extremely cold during the winter season, then you may need more electricity or gas for the heater to keep your home warm during such a season, which will eventually reflect in your bills. So make a proper assessment what sort of utilities you will be using and how much they are going to cost you. You can check the utility provider’s website to get an estimation.

Calculate monthly rate

Once you have analyzed your situation and have estimated the cost of utilities, then calculate the rent you will be paying on a monthly basis. If that exceeds a certain percentage of your annual income, then you should look for smaller properties where you can spend some time until you build additional revenue streams. 


We believe that we have equipped you with the knowledge to calculate your annual income and what percentage of it should go to rent. If you are satisfied with the answer to your question “what is annual income and how much rent you should pay according to it” then do share this article with others and spread knowledge.

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