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INCOME 3 Types of Income 1. 2. 3. Earned Income Portfolio Income 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. 2. 3. 4. Employment - When an employee works for an employer and gets wages/salary in return. Self-employment - This means working for yourself that can earn you money. Business - This implies having a set establishment or system that can churn out money for an individual. Investment - This involves making money out of money or in other words making money out of the accumulate capital. Various Factors that Affect Income Career Choice Education Skills Economic Conditions Occupational Necessities: Class Activity Imagine the world had to start all over. All that exists are water, land, trees, animals and 50 people whose ages range from 10 to 50. 50 people, including yourself, are put you in charge of selecting the seven most necessary occupations to get the world going again. No training for any of these occupations is necessary. List the seven occupations and the reasons why you would select each one. 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 Employee Benefits & Disposable Income The money is taken out of your pay check before your earnings are taxed 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?
