Income and Wealth
Before you invest, you have to have money. So how do you get money?
First there is what is called EARNED INCOME.
Earned income comes from working. Isn't that an interesting concept. If you work, you
make money. You earned it. Thus, the term earned income. The question, though, is
what type of work do you want to do? Do you want to do physical labor or do you want
to do mental labor? Physical labor can take its toll on the body over the years. Mental
labor takes its toll on your brain.
When people think of physical work, sometimes they might think about jobs such as
coal miners, construction workers, or auto mechanics. Remember, though, that athletes,
firefighters, nursery workers, and physical therapists also use physical labor in their
jobs. No matter whether it is physical labor or mental labor, education has a tendency of moving
you up the financial ladder of success in whatever endeavor you choose.
Mental labor jobs include such occupations as doctor, nurse, lawyer, politician, computer
systems analyst, chemist, educator, and business manager. Mental labor has a propensity to require
more education. You are training your brain to do better mental labor.
Using your labor, you receive earned income.
EARNED INCOME
Earned Income is payment received from current work.
*Wages are a payment made on an hourly basis. To receive a wage, you must be working during
those hours.
*Salary is a fixed amount that is paid over a period of time (usually a year) and is not based upon
each hour worked.
*Tips are additional payments for service provided.
*Commission is a payment to the worker usually based upon the revenue he or she generate for the business.
Other examples of earned income are union strike benefits; long-term disability benefits received
prior to minimum retirement age; and net earnings from self-employment (business owner, farmer, or
minister or member of a religious order).
UNEARNED INCOME
Unearned income is income received other than from current work. Examples of unearned income are:
Interests from savings or investments
Dividends distributed to you as a stockholder of a company
Retirement income from a pension or retirement account
Social Security income
Unemployment benefits (income)
Alimony
Child Support
First there is what is called EARNED INCOME.
Earned income comes from working. Isn't that an interesting concept. If you work, you
make money. You earned it. Thus, the term earned income. The question, though, is
what type of work do you want to do? Do you want to do physical labor or do you want
to do mental labor? Physical labor can take its toll on the body over the years. Mental
labor takes its toll on your brain.
When people think of physical work, sometimes they might think about jobs such as
coal miners, construction workers, or auto mechanics. Remember, though, that athletes,
firefighters, nursery workers, and physical therapists also use physical labor in their
jobs. No matter whether it is physical labor or mental labor, education has a tendency of moving
you up the financial ladder of success in whatever endeavor you choose.
Mental labor jobs include such occupations as doctor, nurse, lawyer, politician, computer
systems analyst, chemist, educator, and business manager. Mental labor has a propensity to require
more education. You are training your brain to do better mental labor.
Using your labor, you receive earned income.
EARNED INCOME
Earned Income is payment received from current work.
*Wages are a payment made on an hourly basis. To receive a wage, you must be working during
those hours.
*Salary is a fixed amount that is paid over a period of time (usually a year) and is not based upon
each hour worked.
*Tips are additional payments for service provided.
*Commission is a payment to the worker usually based upon the revenue he or she generate for the business.
Other examples of earned income are union strike benefits; long-term disability benefits received
prior to minimum retirement age; and net earnings from self-employment (business owner, farmer, or
minister or member of a religious order).
UNEARNED INCOME
Unearned income is income received other than from current work. Examples of unearned income are:
Interests from savings or investments
Dividends distributed to you as a stockholder of a company
Retirement income from a pension or retirement account
Social Security income
Unemployment benefits (income)
Alimony
Child Support
There are ways you can receive money other than through earned income and unearned income.
Loans (Borrowing)
When you borrow, you are promising someone that you will pay them back some time in
the future. You can borrow from a variety of sources such as family, friends, or a
financial institution. If you do not pay back your loan, they lose trust in you. Borrowing
is based upon trust. Large borrowing occurs when you borrow to purchase a new car or
a house. You will pay back your borrowing with your future earned and unearned income.
Credit Cards
You hear countless stories about people getting into credit card debt. The credit card is credit;
it is not money. If it were money, it would be called a money card.
Luck
Sometimes you just get lucky. You win the lottery, you marry someone who is rich, you come
from a rich family, you find a valuable item in your attic, and so on.
Illegal Activities
People who take other people's possessions in hopes of making money or being better off
will live in a big house with a lot of other people. It's called jail.
Loans (Borrowing)
When you borrow, you are promising someone that you will pay them back some time in
the future. You can borrow from a variety of sources such as family, friends, or a
financial institution. If you do not pay back your loan, they lose trust in you. Borrowing
is based upon trust. Large borrowing occurs when you borrow to purchase a new car or
a house. You will pay back your borrowing with your future earned and unearned income.
Credit Cards
You hear countless stories about people getting into credit card debt. The credit card is credit;
it is not money. If it were money, it would be called a money card.
Luck
Sometimes you just get lucky. You win the lottery, you marry someone who is rich, you come
from a rich family, you find a valuable item in your attic, and so on.
Illegal Activities
People who take other people's possessions in hopes of making money or being better off
will live in a big house with a lot of other people. It's called jail.
Earned Income is
received from
current employment.
received from
current employment.
Unearned Income is
received outside of
current employment.
received outside of
current employment.
Drag the terms inside the yellow rectangles to
the appropriate column--Earned Income or
Unearned Income.
the appropriate column--Earned Income or
Unearned Income.
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Wealth
Wealth is considered to be a "stock" concept.
Let's look at this example. The bathtub on the
right has a "stock" of water in it. This "stock" is
your wealth.
The concepts located above the bathtub are
considered to be "flow" concepts. A change
in a "flow" concept changes the "stock" of wealth.
Press the up and down buttons to see when there
is a change in the "flow" concept, this changes the
"stock" of wealth.
Let's look at this example. The bathtub on the
right has a "stock" of water in it. This "stock" is
your wealth.
The concepts located above the bathtub are
considered to be "flow" concepts. A change
in a "flow" concept changes the "stock" of wealth.
Press the up and down buttons to see when there
is a change in the "flow" concept, this changes the
"stock" of wealth.
Wealth, also known as net worth, is not the same as income.
Income is: earned income + unearned income
Wealth (Net Worth) is: assets - liabilities.
Wealth comes in a lot of different forms including:
Cash on hand
Amount of money in a checking account
Amount of money in a savings account
Value of financial investments (stocks, bonds, other financial investments)
Value of real estate (house and rentals)
Value of automobiles
Value of collectibles
Income is: earned income + unearned income
Wealth (Net Worth) is: assets - liabilities.
Wealth comes in a lot of different forms including:
Cash on hand
Amount of money in a checking account
Amount of money in a savings account
Value of financial investments (stocks, bonds, other financial investments)
Value of real estate (house and rentals)
Value of automobiles
Value of collectibles
You probably haven't calculated
your own wealth (net worth), so
let's do that now. Start by filling
in the dollar value of your assets
(what you own) and then your
liabilities (what you owe). Your
net worth will automatically be
calculated for you (assets -
liabilities).
When you type in your dollar
values, remember everything you
own has depreciated.
Type in a dollar amount of what
you could expect to sell your
items for in the market place now,
and not the dollar amount you
paid for these items.
your own wealth (net worth), so
let's do that now. Start by filling
in the dollar value of your assets
(what you own) and then your
liabilities (what you owe). Your
net worth will automatically be
calculated for you (assets -
liabilities).
When you type in your dollar
values, remember everything you
own has depreciated.
Type in a dollar amount of what
you could expect to sell your
items for in the market place now,
and not the dollar amount you
paid for these items.
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Let's go several years into the
future to see how your wealth or
your net worth is calculated as
an adult.
You will notice when you make
larger purchases (house, car,
etc.), your assets increase, but
so do your liabilities if you
borrow to make the original
purchase. Remember, assets
can appreciate or depreciate in
value.
Notice when you become an
adult you have the potential to
have larger assets and larger
liabilities.
future to see how your wealth or
your net worth is calculated as
an adult.
You will notice when you make
larger purchases (house, car,
etc.), your assets increase, but
so do your liabilities if you
borrow to make the original
purchase. Remember, assets
can appreciate or depreciate in
value.
Notice when you become an
adult you have the potential to
have larger assets and larger
liabilities.
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What gets people in trouble is when the dollar amount of their liabilities
becomes greater than the dollar amount of their assets.
becomes greater than the dollar amount of their assets.
| Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) The 2015 University of Arizona Five-Star Faculty Award |