INCOME

Remember three sessions ago I introduced you to the equation:

INCOME = EXPENSES + DEBT + SAVINGS.

The next 3 or 4 sessions I will attempt to explain how these terms and equation may help you with your money matters. Again, I will only give you ideas and thoughts.  I stress again and again in this Blog - that I will give you the basics so that you are able to make decisions on your own.

When money is involved, it is very wise to receive input from several people you respect before spending large amounts of income on an item of which you have little or no knowledge.

Always keep in mind that you earned your income and you want to “get the best bang for the buck”.

On the surface you might ask why we are spending time on income. We receive income and we spend it. This is true, but I want to cover some types of income that may need to be handled in different ways than you would handle money received in a paycheck. There are basically three types of income:

1.   Earned Income

2.   Portfolio Income

3.   Passive Income

 

1. Earned income is any income that is generated by working. This includes money made from hourly employment. This also includes money earned from hourly work done for another person or from your own consulting.

Some common examples of earned income include:

a.    Working on a job

b.    Owning a small company

c.    Consulting

d.    Gambling (if you declare yourself a professional) and keep track of all your gains and losses.

When it becomes tax time, each one is treated differently, so it makes your tax reporting somewhat more complex.

2. Portfolio income is when you sell any item at a price higher than what you paid for the item. Often this is referred to as a capital gain or gains.

                              a. This can occur if you are selling stocks or bonds. These  

                                  are referred to as paper assets. Other types of paper              

                                  assets include; Certificate of deposits, Treasury Bonds, Saving Bonds.          

                               b. Buying and selling Real Estate. Portfolio income

                                   would occur if the property is sold at a profit.

                               c. Buying and selling of any other assets if a profit is                

                                    generated from the sale. A few examples of this

                                    are: coins, stamps and antiques that have increased in

                                    value.        

                              You may need some professional help if you are buying       

                                     or selling items listed in item 3 above.

 

3. Passive income is income you receive from something you have purchased or created. An example of this would be if you purchased a house and rented it out for more money than it cost you for the mortgage and other items related to upkeep of the property.

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Remember the equation I gave you above.

INCOME = EXPENSES + DEBT + SAVINGS.

 Always be on your toes to see how you spend or use your money. In the next couple of chapters I will talk about the 3 areas that your income needs to cover.

1.   Expenses

2.   Debt

3.   Savings

If I were to ask you what is the hardest to start and maintain, how would you answer?

All 3 are important and probably addressed in the goals that you are writing. For most people I have worked with, the savings is the hardest to start and to maintain. Most of the articles that I have read stress that people retiring have not put away enough to live securely in their retirement.  One article that was published this week stated that 1 out of 5 retirees will or have died in poverty. PLEASE do not let it happen to you.