Personal Finance and Financial Literacy, It Begins With Earning Income (Blog Post #1)

If our goals when we become adults include achieving financial independence and financial stability in our lives, and reducing the degree of financial stress we subject ourselves and our families to, then we need to begin at a relatively early age to understand core concepts of personal finance. That begins with earning income.

Sure, there are many ways in which we can earn an income when we are in summer jobs while in school; when we are working part-time while we attend school; and then when we enter the real world. But if we can first develop a greater understanding of the different types or forms of income that exist, then hopefully we can begin early-on to make more informed decisions about the path in life we choose to take. Knowledge is power, and my objective -- through a series of blog posts, of which this is the first – is to empower you so that you can make better decisions about your financial future and develop, sooner rather than later, greater confidence in your ability to eventually achieve your personal financial goals.

We all know that people who work earn an income. But what may be less obvious is that income can come in different forms and the form it comes in may influence the direction you may wish to take in terms of your education, any summer jobs or part-time jobs you may want to pursue while you are in school, and eventually your career both in terms of the industry in which you eventually may want to work and the type of job you eventually may want to pursue. You may also want to consider how the different ways in which one can earn an income might influence your choice of hobbies and activities outside of the classroom and, eventually, outside of your job.

The most basic type or form of income is the income that one earns in exchange for the time and effort one puts forth in a job. The job may be full-time or part-time. But not all job-related income is the same. What I mean by this is that there are jobs in which people earn an annual salary; jobs in which people earn an hourly wage and work a specific number of hours each pay period; jobs in which people earn a fixed wage for a specific project or limited time period, and the size of the wage is the same regardless of how many hours one works; jobs in which people earn all or a portion of their income in commissions; jobs in which people earn a portion of their income in tips; and jobs in which people earn a portion of their income in overtime wages and/or bonuses.

In addition, the consistency of one’s job-related income can vary depending upon the source of that income. In the case of some forms of job-related income, one’s income does not change from payment period to payment period. This is the case with jobs in which people earn an annual salary, jobs in which people earn an hourly wage, and jobs in which people earn a fixed wage (i.e., a fixed amount of money) for a specific project or a limited time period.

Jobs in which people earn an annual salary exist in virtually every industry and sector. Compared to jobs that pay an hourly wage, salaried jobs typically require more qualifications (for example, higher levels of education and specific skill sets) and have more responsibilities associated with them.

(1) A “freelancer” is generally someone who is self-employed and who makes himself or herself available for hire on temporary assignments.

In the case of other forms of job-related income, one’s income does change from payment period to payment period. This is the case with jobs in which people earn all or a portion of their income in commissions, jobs in which people earn a portion of their income in tips, and jobs in which people earn a portion of their income in overtime wages and/or bonuses.

Commissions are a type of fee that one can earn. They are particularly common in sales-related jobs, jobs in which one is selling a product or service on behalf of an organization where one may get paid, for example, a specific percentage of the sales they make. Tips are particularly common in service-related jobs. Overtime wages, which are typically some multiple of an employee’s regular hourly wage, and bonuses can apply to a wide range of both services and goods-related jobs.

To Summarize:

There are also forms of compensation that one can earn through one’s job but which are non-cash based. These are commonly referred to as “benefits”. For example, there are jobs in which people receive health insurance through their employer; a retirement plan through their employer which their employer also may contribute money to; paid leave, for example, to care for a family member with a serious health condition or to care for a newborn; life insurance; and even things like tuition assistance for school. While these are non-cash earnings, they nevertheless can be very valuable forms of additional compensation that one can earn in different jobs.

Finally, there are ways to earn income besides through one’s job. One way is by taking a portion of your earnings or savings and investing it. When you do that, you give yourself the opportunity to earn interest income, dividend income, and/or what are called “capital gains”. With the help of interest income, dividend income, and capital gains that you earn through investing, you not only can help save for retirement but you can put yourself in a better position to be able to cover large purchases that you may want to make earlier in your life – such as a large-screen TV, an awesome video game console, a home stereo system, a computer, a car, and a home.

Interest income is money you can earn when you put your earnings or savings in a savings account at a bank. You also can earn interest income by investing, specifically by investing in financial assets such as US government bonds, US municipal bonds, corporate bonds, fixed income exchange-traded funds (ETFs), and fixed income mutual funds. Bonds are a type of financial asset and those who invest in them receive interest income on their investment because bonds are basically a type of loan. The borrower is a government, such as the US government, or a company, like a Nike or an Apple for example.

Both exchange-traded funds and mutual funds are types of financial vehicles that pool together money from many different people and invest that money on their behalf. Fixed income exchange-traded funds (ETFs) and fixed income mutual funds themselves invest in bonds, so a very easy way for someone like you and me to earn some interest income is to invest in bonds through exchange-traded funds or mutual funds which happen to be professionally managed.

Dividend income is money you can earn when you invest in other types of financial assets like stocks, stock exchange-traded funds (ETFs), and stock mutual funds. Stocks are ownership interests in a company. Stocks of public companies are mostly bought and sold on what are called “stock exchanges”. There are many public companies, across all types of industries, that pay cash distributions to the owners of their shares. Those cash distributions are called “dividends”. Again, Nike and Apple are examples of public companies that pay dividends to those people that own their stock. Stock exchange-traded funds (ETFs) and stock mutual funds themselves invest in stocks, so again, a very easy way for someone like you and me to earn some dividend income is to invest in stocks through these types of professionally managed funds.

And then there are “capital gains”, which are the profits you earn when you buy an asset and sell it at a higher price than you bought it for. If you take a portion of your earnings or savings and buy something that proceeds to increase in value, such as a rare baseball card or an autographed basketball or a piece of gold or silver jewelry or real estate like your home or a financial asset like a stock, you can then resell it at a profit. That profit is capital gains income. As an example, a 1948 Jackie Robinson baseball card sold for nearly $400,000 in 2021. Back in 1948, the cost of a pack of baseball cards, much less a single baseball card, was likely pennies. The difference between the cost of that baseball card and its resale value represents capital gains income. As another example, let’s say you buy a piece of gold jewelry, the price per ounce of gold after your jewelry purchase rises 30%, and you resell the piece for 30% more than you bought it because the price of gold went up. Again, the amount of profit you just generated on buying and reselling that piece of jewelry represents capital gains income.

A third way to earn income, besides through your job and through taking a portion of your earnings or savings and investing it, is through “passive” means. One earns “passive income” when one has previously sunk personal time or money into something and then at a later date been paid for that earlier investment of time or money. In other words, one is now getting paid for something in which one was actively involved in the past but which one no longer has to spend much time and effort on, if any.

What are examples of sources of “passive” income? Think music that one may have previously written and recorded and on which the artist receives ongoing “royalties” (i.e., payments) from others for the legal right to distribute or sell that artist’s work. Think merchandise on which there is an athlete’s name or image and on whose sales that athlete receives royalty payments. Think a TV show that an actor may have previously acted in and on which that actor receives royalty payments for every episode re-run. Think a book that one may have previously written and on whose ongoing sales that author receives royalty payments from the book’s publisher. Think an ongoing ownership interest in a business of some kind that one previously held an active role in and now receives ongoing profit distributions. Think a real estate property that one may own and simply rents out to others in exchange for monthly rental payments. Think an inventor who acquires a patent and earns ongoing licensing fees from others for the use of that inventor’s patent. In short, generating passive income is a pretty attractive way to make some money.

Here is the bottom line: there are several ways to earn an income. In other words, income can come in different forms. Some of these forms or types may appeal to you more than others and, because of that, consider how these various ways in which one can earn an income might influence the direction you may wish to take in terms of your education, any summer jobs or part-time jobs you may want to pursue while you are in school, and eventually your career both in terms of the industry you eventually may want to work in and the type of job you eventually may want to pursue. You may also want to consider how the different ways in which one can earn an income might influence your choice of hobbies and activities outside of the classroom and, eventually, outside of your job. Perhaps you can even find a way to turn the hobbies or activities you enjoy into income-generating opportunities.

I would love to hear from you. Any ideas, experiences, thoughts, comments and questions….please do share.

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