Income Is the Fuel for Your Personal Finances

Income Is the Fuel for Your Personal Finances

Written by Deepak Bhagat, In Business, Updated On
April 9th, 2024

It is challenging to develop personal finances and make them sustainable over time. However, with dedication and perseverance, good results can be achieved. In this note, you will learn some fundamental aspects of 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 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 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 is the sum of money that you receive every month, regardless of the effort you make to achieve it. An example is a salary from a job in a dependent relationship.
  • Variable Income is the sum of money you receive, but it is not necessarily the same every month.

According to the dedication of time:

  • Active Income: These require a high dedication to time, motive, and intellectual force. For example, a 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 can vary according to time and the stage of the person’s life. Now, the identification of income is a fundamental axis for the assembly of your budget.

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

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

  • Income under a dependency ratio 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 a fixed amount plus another variable for sales commissions, performance bonuses, etc.
  • Income from the provision of services: This income is variable and 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 and emergency salaries, among others. There are private institutions that also grant this aid, for example, in the form of scholarships.
  • Income from entrepreneurship comes from the profit (profit) of developing your own business.
  • Financial income: It originates from the result of financial operations using various instruments in the capital and currency markets, among other places.
  • Family support income: These are transfers from a relative (father, mother, grandparents) to help financially.
  • Income from rentals, canons, or franchises is a passive fixed or variable source that is applied to the rental value (rental) of land, property, and the 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 perfume reseller, 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 a 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 by comparing 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 helps you understand where the resources come from to meet your living costs and achieve your goals. Being transparent about your income is essential because, along with sound 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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