CFO of Life #90: Higher income? - the thing that makes or breaks your finances

Income, revenue, take-home pay and profit - they are all words that can be used to explain the same thing. Although they all have slightly different meanings, we can simplify them under the umbrella of “the money you get at the end of the month”.

For most people, that would simply be their salary and nothing else, but income can be a myriad of things. It represents the money they earn from working their primary job, the money they make from their side hustle, maybe dividends from an investment or rent from a rental property. There is no limit to what is income, but one thing is clear - we all need it!

As this topic is extremely important, I put together today's article to help you (and me) decide on the path towards increasing our income.?

How is income calculated and what are its components?

In simple terms, income is determined by the price of income per unit of work. Most of the time, this would be a fixed amount of $ per hour or day. This is how most services are paid, by the unit of hours you work, not by the unit of achievement.

In other cases, that could be a fixed amount of payment for a unit(s) of production. That way you get remunerated for creating product(s) regardless of how much time it takes you.

And here is the first key principle you need to understand when trying to maximize your income. There is a limited number of hours you can work in a day, in the best-case scenario that is 24 hours. Even if you can work 24 hours a day every day, you can earn 24 times your hourly rate.

But on the other hand, if you get paid to create something, you can always leverage more labour and create it quicker. So if you get paid $100 to create one mug and that takes you 10 hours, effectively you make $10 an hour. At the same time, if you find someone to do it for you for $8 an hour for the same number of hours, you can still make a bit of money while someone else creates the product for you.?

And that is how you can easily take your time and leverage additional work to increase the number of hours you have available for work. That is also how companies make so much money, as they leverage the time of their employees and the capital they have to create products for less than the price they make it.

I know this is a vague example, but hold on for a moment. Let's go over the next part and then we will go back to the income equation and hack it.

Before that, we need to talk about the different types of income. Not all of us are lucky enough to get an extremely good salary that is enough to ensure we can reach our financial goals.

(Earned income is any money you make from salary, commissions, tips, bonuses or any self-employed work.) This category encompasses all of the different types of income that you earn in exchange for your time.

(Dividend income or the recurring payment is what you receive from the business that you invested in, any rent you collect or royalties for patents you own.) This is the passive money you get from any assets that are bringing in profits.

(Capital gains income is the profit made from selling assets like stocks, real estate or investments.) Simply said, any money your money makes for you.

(Tax-exempt income is income that you make that is not taxed by the government.) This can be benefits, grants, scholarships or any other non-taxable income.

Now that we scoped the broad type and sources, let's move to the next complication. Understanding which category and type you prefer is extremely important. As not only you will be working towards what you like, but towards something that works for you. And I will guide you through 3 different ways of looking at income.

Passive vs Active?

It is simple, actively making money is anything that involves you spending time to work or looking after people who work for you. On the opposite, passive income is any money you make from your money while you sleep. While nearly everyone would like to have enough money so they can sip cocktails on the beach, that is hard to achieve. But that is a whole other story.?

Salary vs Equity?

It is important to understand if you want to work for a salary or equity. If you would prefer stability and predictable income, I recommend that you go for a salary. It will be there as long as you have a job and it will arrive (hopefully) every month.

Whereas if you work towards building a business and earning equity, things would look differently. You might not have the easiest time. You might not have the most predictable income as your business would go up and down every month. You might not be able to sell your equity for a long long time, but if the stars align, you might get super lucky and have the chance to sell your business.

Service vs Product

Another aspect you need to decide on is if you would be offering a service or a product. That would determine what approach you need to take, how much time you would need before you start making money and how scalable it is.

If you offer a service, you will probably be able to start as soon as possible and get almost instant results. If you are doing lawn mowing, you can immediately start doing that.

Where if you are creating a product, you need to design it first, sample it, manufacture it, ship it and hope it doesn't fail. But once you create it, then you can extremely easily scale it.

That is a simplification, but it is all about getting that point across. The next few articles will cover this in more detail and we will unlock the next steps.

Now, the best part of income and how to master it. The income equation and where most people fail when it comes to mastering your finances.

The income equation is simple:

Income is an equation of time invested x the effort you put in x your knowledge on the subject x the professional network you have x the willingness to succeed x sources of income.

It is that simple, but depending on what you do it depends on how much you need to emphasize each part of the equation. No matter what you do, your willingness to succeed will make or break any of your success.

But, no matter what you do, if you have one source of income, it would be hard for you to succeed. As most of the time your salary would not be enough.

That is why, next week we will look into side hustles and why they are important. How you can use them as a proof of concept or a way to develop your skills to service those side hustles.

Thank you for reading! All comments and topic suggestions are highly appreciated. Post #90 in the series CFO of Life #si #personalfinance #CFOofLife