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?