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Income - Head Matters


1. What Affects Income

a. Factors affecting income

Earned income
Income is many things, depending on what type of income is being discussed.  Earned income, often called compensation, or total compensation, is the total wage or salary and benefits that an employee receives.  Employers use this term because it’s the total expense of the employee – not just their wages, but their benefits as well.  On the other hand, employees, who are usually most concerned with what they have to spend, often ignore or disregard their total compensation amount.  Usually an employee is most interested in their bottom line income or take-home pay as it is often called. An employee’s bottom line income is called net pay, and refers to income remaining after taxes and any other deductions are subtracted from gross pay.

Unearned income
Another type of income is unearned income. Unearned income is income that you don’t work to earn, but rather your money works for you.  This happens when you invest your money into a savings account; your money may be earning interest or increasing just by keeping it in your bank or credit union or investing it.

For example, if you invest $100 in a stock that grows by 20 percent, your $100 would have grown to $120. That extra $20 is considered unearned income.

It is important to remember that you should only count unearned income in your budget calculations if the unearned income comes from a savings or investment where you can easily get the money without a penalty.  For example, if your savings account makes $0.20, you can include that as income because you can easily access that money. However, if your 401K grows by 7 percent, you should not include that unearned income in your budget calculation because that income should not be accessed before retirement except in the case of an emergency.  It is tempting if you are years from retirement to withdraw that unearned income to spend now.  You will need it a lot more when you don’t have any earned income during your retirement years!
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