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INCOME
3 Types of Income
1. Earned Income2. Portfolio Income3. Passive Income
Earned Income
Any income that is generated by working
Activities that generate earned income: Working a job Owning a small business Consulting Gambling Any other activity that
pays based on time/effort spent
Earned Income
Pro: don’t need any startup capital in order to make earned
income
Cons: once you stop working, you stop making money because the amount of money that is made through
earned income is directly proportional to the time and effort you spend working, it’s difficult for someone to make more earned income without either learning a new skill or working longer hours
earned income is taxed at a higher rate than any other type of income.
Portfolio Income
Income generated by selling an investment at a higher price than you paid for it
Activities that generate portfolio income: Trading paper assets (ex:
stocks, bonds) Buying and selling real estate Buying and selling and other
assets (ex: antique cars)
Portfolio Income
Pros: Once you have the knowledge and experience to
generate portfolio income regularly, you can continually reap the benefits by reinvesting after each sale.
any portfolio assets held long-term are generally taxed at a lower rate.
Cons: takes a good bit of knowledge and experience to learn
how to make money trading paper assets have little control over your investments generating portfolio income generally requires you to
have money to invest upfront portfolio income is often taxed at very high rates
Passive Income
Money you get from assets you have purchased or created
Activities that generate passive income: Rental Income from Real Estate Business Income Creating and Selling Intellectual
Property Affiliate or Multi-Level Marketing
Passive Income
Pros: recurring income allow the owners active control over the
investment allow for the most favorable tax treatment
4 Basic Ways to Earn Money
1. Employment - When an employee works for an employer and gets wages/salary in return.
2. Self-employment - This means working for yourself that can earn you money.
3. Business - This implies having a set establishment or system that can churn out money for an individual.
4. Investment - This involves making money out of money or in other words making money out of the accumulate capital.
Gross Income vs. Net Income Gross income =An individual's total
personal income before taking taxes or deductions (ex. life insurance, 401K etc.) into account.
Gross Income-Taxes-deductions= Net Income Net Income is also known as take home
pay.
Various Factors that Affect Income
Career Choice Education Skills Economic Conditions
Skills
Earning power is the ability to earn money in exchange for work. How much you earn depends on the value of your skills in the marketplace.
An individual’s value as a worker – the wage or salary received for a specific job – is related to the skill level and education of the worker, the demand for that work in society, and the availability of qualified workers.
Education
Generally, in our society, people with higher education and more skills earn more money on the job than those with less education and fewer skills.
VALUE OF EDUCATION
Disposable Income
Examples: Taxes Government transfer
payments Employee benefits
Government Transfer Payments
Account for about 20% of disposable income
A decrease in transfer payments will negatively impact the economy.
Taxes & Disposable Income
Taxes provide money for the government to operate and provide services to you and others
Lower the disposable income we have left for our own wants and needs
The money is taken out of your pay check before your earnings are taxed
Adjusted Gross Income
Adjusted Gross Income is defined as gross income minus adjustments to income. Formula Gross Income-Deductions= AGI (Adjusted Gross Income)
Employee Benefits
Are various non-wage compensations provided to employees in addition to their normal wages or salaries. Also known as fringe benefits.
Ex- Sick and vacation days, tuition reimbursement, housing, car, retirement benefits, childcare, employee discounts.
Employee Benefits & Disposable Income
Tax-Deferred Plan: means that taxes due on the amount invested and/or its earnings are postponed until funds are withdrawn by you to use usually at retirement Examples: 401K, 403B, IRA
So, What do you think?
Who has an income? What type of income? Is it from working? What kind of job?
Remember, earnings from babysitting or dog walking counts as income.
Have you ever sold anything on eBay or to a friend?
If so, what type of income was the money received?