Income refers to the money or equivalent value that an individual or business receives in return for a service, product, or investment. This money can come from different sources such as salaries from employment, profits from business transactions, royalties from publishing a book or piece of music, interest on savings, dividends from investments, or rent from owned property. In short, it’s the earnings generated from various forms of labor, capital, or a combination of both.
1. What are the different types of income?
There are three main types of income: active income, passive income, and portfolio income. Active income is the earnings you receive from performing services, including salaries, wages, tips, commissions, and income from running a business. Passive income is acquired through little or no effort on your part, such as rental property income or business activities where you don’t significantly participate. Portfolio income is derived from investments, including stock dividends, bond interest, or capital gains from selling securities at a profit.
2. What is disposable income?
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Disposable income is the amount of money an individual or household has to spend or save after taxes have been deducted. It’s an essential personal finance concept because it’s what you’ve left to fund both necessities and extras.
3. What is the difference between gross and net income?
Gross income is the total income earned by an individual or business before expenses and taxes are deducted. On the other hand, net income is the amount left after all deductions such as taxes and expenses have been made from the gross income.
4. What happens when your expenses exceed your income?
If your expenses are consistently higher than your income, you find yourself in a ‘deficit spending’ situation. Over time, this can lead to accumulated debt, the need for lifestyle changes, or seeking additional income sources.
5. What is income tax and why is it important?
Income tax is the amount of your earnings that the government requires you to pay, based on your income level and filing status. This tax revenue helps fund public services, infrastructure development, defense, and other government expenditures.