What Is Income?
"Income" refers to money that you make from a range of sources including working, business activities and investments. For example, your salary, tips and bonuses count as income just like money you make from investing in the stock market and owning a business. Income also includes rent payments made to you by a tenant and royalties such as those paid to writers for books and songs.
Some people earn income that is constant, while others have more variable income. For example, if you work for a large company that pays a fixed salary, it's easy to know how much you're going to bring home each month. However, if you're self-employed or rely on tips for a substantial portion of your income, it can be harder to predict your monthly earnings. But, if you keep track of how much you've earned in the past, you can make educated estimates about how much you will earn in the future.
Income for Tax Purposes
The Internal Revenue Service divides income into two broad categories: ordinary income and capital gains income. Ordinary income generally includes whatever money you make from working, like your wages, or from renting property. Capital gains refers to income you make from selling capital assets. The IRS considers capital assets to be things like your home, car or furniture. If you have capital gains income from assets you've held for more than a year, you pay a lower income tax rate on that income than on ordinary income.
Managing Your Income
Once you know how much income you're earning, budgeting helps you keep your spending in line with your means and plan for future financial goals. For example, if you want to buy a house in a few years, carving out some of your income to save for your down payment makes it more likely you'll meet that goal. To assist you in managing your income and expenses, consider using personal finance software like Quicken.
Debt Relative to Income
Before taking on additional debt, consider how it compares to your earnings. According to US News, you have to put the amount of debt you have into perspective by considering how it compares to your income. For example, when it comes to mortgages, lenders typically want your monthly payment to be less than 28 percent of your income and all of your debt payments, including student loans and auto loans, to be less than 36 percent of your income."
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