Income Is the Fuel for Your Personal Finances

Income Is the Fuel for Your Personal Finances

Written by Deepak Bhagat, In Business, Education, finance, Published On
February 14, 2021
Last modified on September 2nd, 2022

Starting to develop your personal finances and make them sustainable over time is a challenge. With dedication and perseverance, good results can be achieved. In this note, you will be able to know some fundamental aspects about the engine of your financial life: your income.

What is income?

We can define income as the sum of all the money you receive, that is, it enters your personal economy under all circumstances (a job is done, a gift in money, a State aid, etc.) and that finally ends in your bank account available for the purpose you decide to give it: pay, save or invest.

How are they classified?

Income can be organized in different ways. The classifications can help you identify what type of income you are receiving and will be a great tool to manage your personal economy. Here are some of the most common classifications that are used to differentiate and identify income:

According to its variation over time:

  • Fixed Income: It is the sum of money that you receive every month, regardless of the effort you make to achieve it. For example, a salary from a job in a dependent relationship.
  • Variable Income: It is the sum of money that you receive but that is not necessarily the same every month.

According to the dedication of time:

  • Active Income: They are those that require a high dedication of our time and motive and intellectual force. For example, the salary is compensation for eight hours of work per day.
  • Passive Income: These are those that require a low dedication of our time and are generated by themselves. This does not mean that they are generated alone, but that there is less time used for them to be generated. For example, capitalized interest on fixed terms, the sale of online courses, or the rent we receive for renting a property.

The income classification can be combined and vary according to time and according to the stage of the person’s life. Now, the identification of income is a fundamental axis for the assembly of your personal budget.

In the Tools section, you will be able to download an excel file ready so that you can complete and start putting together your first personal financial budget 🙂 Link to the budget

Below, you can find the different income that a person can have, based on the previous classification.

  • Income under a dependency ratio: It is one of the most common sources. It is the money that a person receives at the end of the month for having loaned their work to the employer. It is called “salary” and can be made up of a fixed amount, plus another variable for sales commissions, performance bonuses, etc.
  • Income from the provision of services: They are variable and are determined based on the number of clients and the invoicing of your service.
  • Assignments and aid: These are items transferred by the National, Provincial, or Municipal State under various concepts and are not reimbursable. They include family allowances, emergency salaries, among others. There are private institutions that also grant this aid, for example in the form of scholarships.
  • Income from own entrepreneurship: It comes from the profit (profit) of the development of your own business.
  • Financial income: They originate from the result of financial operations with various instruments in the capital and currency markets, among others.
  • Family support income: These are transfers that come from a relative (father, mother, grandparents) in order to help financially.
  • Income from rentals, canon, or franchises: It is a passive fixed or variable source that is applied for the rental value (rental) of the use of land, property, and exploitation of a business or brand by third parties.
  • Income from intellectual property rights: These are those that come from the publications, editions, or patents of inventions under your name, in which you perceive a variable about their use.

For example, Tomas receives a salary for working in a supermarket during the week; those would be your fixed income and assets. In addition, he is a reseller of perfumes, which would be variable income for the units he sells. Lastly, he collects rent on a house that he inherited from his grandmother every month, which would be fixed and passive income.

All sources of income are important because they contribute to your economy. However, you could use the following strategies to optimize your sources of income:

  1. Diversify the sources of income: As far as possible, do not stay with a single source of income, so that, given a complicated situation that interrupts one of them, you can count on other inflows of money. Little by little, you can develop other sources of income to have more solid finances.
  2. Calculate how much you earn per hour in each source of income: One way to weigh them is with the relationship of how much money you earn for each hour worked (or how much money you want to earn for each hour of work). By doing the calculation, you will be able to know if you are not wasting other more profitable opportunities.

Economy Tip: If you have your own business, always keep your personal and entrepreneurial finances separate.

In short, identifying and categorizing your sources of income help you understand where the resources come from to meet your living costs and achieve your goals. Being clear about your income is essential because, along with good financial habits, you will be able to make better decisions regarding where you spend the money that makes up your personal economy tuition.

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