How To Get Off Income Management

How To Get Off Income Management

Okay, so assume that you have just received your pay cheque on the first day of the month, what would you do with the money that you got? Maybe you would first pay your EMI or maybe your house rent or your Child's education fees, and keep aside the rest of the amount for the month. But now the question comes- “why do you need to understand the importance of income management?”

Before answering this, we need to understand what is income management?

Income management definition: Income Management is a technique that is used to maintain a perfect proportion of the needs, wants, savings, and investments of a person. If this is too technical let’s classify it by some examples.

Needs: - Needs are the deficiencies that must be fulfilled like you need food and water for your survival. You need clothing and shelter to protect your body. Therefore foods, clothing, and shelter are basic needs.

Other needs make our life easier, like for example a car to commute. But if you don’t have any it won't be a problem as you can easily use a cycle or public transport or you can easily walk instead. So that’s now a part of the basic needs.

Desires/ wants: - After all the needs are fulfilled you begin to think about your desires. Desires are not something that is needed to carry on in your life. But still, people wish to have it. Like for example, people can have the desire to have a 3-bedroom apartment or a luxurious sports car. These are the things which can people survive without having them.

Savings: - This is part of the money which is been left out after fulfilling all the needs and desires and is been kept as a reserve for the future. If there are any uncertainties or in an emergency need for money, you can easily withdraw and use it.

Investment: - With time the value of money decreases due to various factors like inflation, technological advancement, etc. So if you leave your money in your bank account then eventually it would lose its value. So it's better to invest in some asset class that would give you a good return over time.

So as we have understood the basic terms, now let us discuss

Different Types of Income Management: -

1    Earned income: - This is the primary source of income. It is the type of income that is difficult to earn and difficult to increase with time. The growth of salaries happens at almost a fixed rate. Even if a person wants to increase their salary they have to work for long hours eventually. As people get older their capacity to work also reduces and they can’t work for long hours. At this point, the responsibility towards their family also increases with time.  It is been noted that salaries have been a highly taxed source all over the world. In most developed nations, salaried income is taxed at almost 50%. This means that once a person crosses an income threshold, their motivation to earn gradually reduces because of the higher taxation rates.

2)     Investment Income: - This is the type of income that is generally generated by selling the investments that you have made earlier. This represents an increase in the value of your investments or capital gain. For instance, if a person buys shares of a company and then sells them at a higher price or a person buys a property or a house and sells it at a higher price, the difference is the capital gain. This kind of income has no relation to how many hours you work. This income is not received periodically, it gets accumulated over some time and is paid out when the investor thinks to liquidate his investments. And the major part is that is a lot more tax efficient than earned income. This investment is only possible if the asset of the capital is held for a long period.

3)  Passive income: - It is one of the important sources of income. It shares most of the characteristics of earned income and investment income. It is generally paid periodically like the earned income. It also does not depend on how many hours you have worked. It generally depends on how much capital you have invested in that asset. Some examples of passive income are- Rent, interest, dividend income, etc. The taxation on this income is generally lesser than earned income.  There are some incomes like dividends which are tax-free.

So now as we have discussed the types of income, We have to find out how to manage our income.  For that now we would look into the: -

Process Of Income Management: -

1)  Planning the use of income: - After you receive your salary, plan how you would spend your money and where you would spend it. Point out the needs and wants first and always remember to keep a part of the income as your savings while you plan your expenditure.

2)  Controlling the use of family income: - There are two ways to keep an eye on your expenses: -

·        Take note that your money is not been wasted:-  For example, you should buy the wrong quantity and avoid wastage, Buy from a wholesale or a supermarket where you can get the things at a cheaper rate.

·        Make use of your time, energy, skills, and knowledge to cut your expenses: - If your expenses are well planned and controlled then your needs as well as your desires will be fulfilled.

Conclusion: -

There is no readymade Income management system plan. Everyone has their own needs and desires. The management plan for income differs from the income level of the individual. Some people with higher incomes would likely spend more on their desires and save more, whereas some people with low incomes have to control their desires and limit their expenses to the situation. Everyone should rather focus on generating different sources of income so that to increase their net income and there are no compromises made.