In any discussion about personal finances, there are three terms that show up again and again: income, wealth and net worth. While these terms may seem interchangeable, there are a few important differences between them.
Understanding these differences is important when it comes to getting an overall sense of your financial health and creating an effective long-term plan. Read on to learn how income affects wealth, and how you can use these concepts to determine your net worth.
Of the three concepts mentioned above, income is perhaps the one most people are familiar with. In short, income is the amount of money you receive. Usually, your income is computed per month, but there are other sources of income that can be received per week, quarter, or even year.
For most people, an income is synonymous with a paycheck that they receive on a monthly or biweekly basis. However, there are many other types of income, such as rental income if you are a landlord, income you get from selling stocks, etc. Let’s take a look at a few of the most common ones.
Salary or Hourly Wages
As mentioned above, the basic source of most people’s income is a salary if they are working for someone else. In exchange for services, the company pays a certain amount of money per year or per hour. Bonuses and other monetary benefits are also considered income.
Another source of income is commission. This type of income is common for people who work in sales. Unlike a salary, commissions are not usually paid per month, but instead, per service completed or goal reached. Commissions can be combined with a base salary. Like commissions, tips also count as income.
Profits or Net Revenue
If you have a business, then you receive an income through the net revenue you earn by selling your products. By subtracting the expenses of your business from your total income, you get the amount of your profit from the business.
Another source of income is interest from loans. If you lend your money to someone with an agreed interest, then you are earning an income through that interest.
Likewise, the interest you earn on your bank is part of your interest income, as the money you deposit to banks is considered a loan.
If you have shares in a company, then you probably know about dividend income already. This is the income generated when you have invested in a profitable company.
If you have real estate, then you can rent it out to receive a rental income. The money you earn is your taxable rental income.