Article by:
Will Reed
The Personal Finance six-part series is designed to provide information & guidance to help readers better understand and navigate through the world of money.
The first element in this installment of personal finance that we are going to dive into is Income. It can come in various forms and many sources for all of us, and it is identified by several descriptors – money, cash, the bag, bands, and many others. It is easy to come by and easier to part with. Before we get too far down the road, let’s get an educated, more professional definition at what income is. According to www.Investopedia.com income refers to the money that a person or entity receives in exchange for their labor or products. Income may have different definitions depending on the context—for example, taxation, financial accounting, or economic analysis. For most people, income means their total earnings in the form of wages and salaries, the return on their investments, pension distributions, and other receipts.
Since a more recognizable term for income is money, we will use them interchangeably. An often misquoted scripture is 1 Timothy 6:10, “For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.” People will say “Money is the root of all evil.” They will leave out “love of” and exclude the ending.
Income allows us to do many things from taking care of life’s basic necessities to the extravagant. How much is enough and how much is too much depends on who has it. If one would as the average 21 year old what would he or she do with a million dollars, the answers would range from traveling to purchasing cars & houses and definitely partying. However, ask the average 45 year old that has had a few more of life’s experiences, the answers would be paying off debt, making some sound investments and making sure their spouse and children have little to no need for any of the basic necessities of life.
Let’s examine some of the forms of income, planned uses, and how much should we plan to lose as well as keep. Gross income is what we earn before taxes, and net income is what we keep after taxes are paid. Over time, the percentages of planned or projected uses have changed. The US Department of Housing and Urban Development (HUD) has a long standing “rule” that no more than 30% of a household’s annual gross income should be spent on housing. However, housing costs have risen at a rate of 4 times that of household incomes (https://listwithclever.com/research/home-price-v-income-historical-study/). Couple this cost with other costs of living such as education and child care, insurances (life, health, auto and housing), and food, this leaves very little for investment and/or long range financial planning.
Unfortunately, incomes have not risen at the same rate as the cost of living in the US. This has forced many a households to seek additional revenue streams even with more than one income earner in the home. According to the US Bureau of Labor 58% of US households have dual incomes, 13% have single incomes, and the remaining 29% constitute the non-working as well as multiple income households (https://www.bls.gov/opub/mlr/2020/article/comparing-characteristics-and-selected-expenditures-of-dual-and-single-income-households-with-children.htm).
However, even with lagging incomes, budgeting and not trying to keep up with the materialistic views society glamorizes, one can live a modest yet very comfortable life and be very well prepared for retirement. It’s all about what one does with his/her income, not how much income is brought in. In next month’s writing we will take a closer look into the topic of spending. Until then, be safe and God bless.
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ABOUT THE AUTHOR: Will Reed IV is a licensed Financial Professional with MassMutual Arizona and has worked in the industry for three years. He holds a BSB in Marketing from San Jose State University, MBA in Marketing from the University of Phoenix, and a Masters of Divinity from Liberty University. He retired from a life of public service after a 23 year career working in the housing sector with the US Department of Housing and Urban Development.