Income is one of the most important aspects of your personal finance. It tells us how much money we have at any point of time and it is also used for the purpose of making sure that we do not fall short of our requirements. There are various types of income and this article will try to explain them briefly.
Income is the use and production opportunity gained by a person over a given time, that is, it is the output. In other words, it is what we earn, minus what we spend on its production. When we look at our personal finances, the biggest percentage of our total income goes towards our consumption. The remainder of it can be called as investment income. Investment income is basically a return on our money.
If you look at the other types of income, the second largest portion of the total is called passive income. This is mostly generated through investments that we have made in the past. We can either make a good deal of profit from these investments or not. Our income then is derived mainly from these investments. So, it is very important to understand what we are earning and how these investments affect us and our future.
One type of income that is very often overlooked is inheritance income because of the lack of knowledge about tax law. Inheritance refers to the transfer of property from one person to another before the death of that person. Inheritance is usually taxable if the property is very valuable.
Another income that comes under entrepreneurship is business. This refers to any kind of business that produces income but has no tangible assets. The only assets that matter here are those that are held in the form of stocks or mutual funds. There are other forms of business that also qualify for this category of income such as art, real estate, and intellectual property. The income generated in this category is also taxable if the property produced by the business is very valuable.
Lastly, there is interest income. This refers to any income earned on the money that you lend to someone else. It is usually taken from the loaned amount and then paid back over a fixed period of time. Interest is usually tax deductible, but usually not so when it is on a debt, in the form of principal and interest on a home loan or a car loan.
For the purpose of this article, we will assume that you are working full time and earning a certain amount. in any of these categories above, you can easily calculate your income from the above mentioned groups. Then, check out the figures and see how they might change over the next few years.
If you are a stay at home parent, then you have to take care of your current income first. Remember, if you earn more than your current salary, then the government might give you a special allowance for being a stay at home parent.
If you are a business owner, you need to look into your expenses and income tax returns carefully. If you don’t know how to calculate your expenses, then use an expert and he will help you. Also, you will need to prepare your personal taxes, which are usually much less complex than a business one.
You also need to be careful with the expenses you incur. If you spend a lot of money on food and lodging, you may have to pay a lot more in taxes than what you need to. So, you need to consider this.
You also need to have enough financial resources and capital in case you need to borrow money. Some people might think that borrowing money is a good thing to do because you can borrow it for your business expenses. This is not always the case. However, you need to be very careful with this aspect because this could lead you to many problems in the future.
So, the key to saving money is planning well. This planning is best done before you begin your work life.