• Ryan P. Cleary

Float Finance 3.1: What is Income?



In this article we will overview different types of income and ways to receive income.

FloatMeEDU is a series of accessible articles, tools, and resources designed to empower early career employees and students to navigate their financial journey.


What is income?

Income is money you receive, but there are several different types of income. Separating income into different categories can make tracking your income easier.


Earned Income

This is income you earn by working, whether it is wages from a job, tips, contractual work (including activities like being an Uber driver, or what you make through self-employment.


Income from assets or investments

Assets are things you own. An example of income from assets is the interest that a financial institution pays you on the money you keep in your account. Or maybe someone pays you to borrow your lawnmower or pickup truck. Some people also earn money from stocks, bonds, a business, or real estate.


Public benefits or entitlements programs that pay money

This includes payments from programs like Social Security Disability Insurance (SSDI) and Suplementat Security Income (SSI). It is important to fully understand any benefits that you may receive. That way you know what income to expect in the future. And, consider reviewing the program rules you need to follow to keep the benefits. To learn more, use the contact information on your most recent written communications from the program. Or, talk with your benefits counselor or other trusted person who helps you with your benefits and finances.


Other benefits or entitlements

This form of income may make it possible for you to buy or receive food, or use public transportation. These are things you would have spent money on. So even if they are not paid in cash, benefits can be considered a form of income. They free up your money to spend on other things. Examples include:


  • Child-care subsidies

  • Public transit discounts

  • Supplemental Nutrition Assistance Program (sometimes called SNAP or “food stamps”)

  • Special Supplemental Nutrition Program for Women, Infants, and Children (WIC)

  • Housing assistance


Other forms of income

Other common types of income include gifts, child support, and alimony.



Gross and Net Income

The income that you take home is usually less than the “earned income” you make from working. Gross income is your total income before deductions and taxes. Net income is your gross income minus any deductions like social security and income taxes. Net income is sometimes called “take-home pay” and is what you have available to save and spend.


Ways to Receive Income

There are five common ways to receive income to your account- we’ll cover the pros and cons of each.


Cash

Pros:

  • Generally accepted for purchases you make in-person.

  • Available for use right away.

  • Can be deposited in a checking or savings account that offers federal deposit insurance and other benefits.

  • Could load onto a prepaid card.

  • If you just stick to spending the cash you have, you can avoid spending more money than you have.

Cons:

  • Could be lost or stolen.

  • Does not have federal deposit insurance unless it is deposited in an insured account.

  • Some people find it tempting to spend cash (it “burns a hole in their pocket”).

  • Can be more difficult to track for personal budgeting and tax purposes.

  • Can’t be used for online purchases.

  • Not all bill payments can be made in cash.

  • If you pay all of your expenses in cash and don’t have a loan, you miss the chance to build a positive credit history. This means that it becomes harder to get a loan when you need it.

  • If you are paid wages in cash, there is a good chance taxes were not withheld from your wages before you got paid. That means you may need to remember to set aside some of the cash to pay taxes yourself.


If you immediately deposit your cash in a checking or savings account that offers federal deposit insurance, many of these cons go away.


Paper Checks

Pros:

  • Can be deposited in a checking or savings account that offers federal deposit insurance and other benefits.

  • Could load onto a prepaid card.

  • If you do not have an account at a financial institution, you may have to pay a fee to cash the check. If you go to the financial institution where the check is from, you may be able to cash it there without a fee.


Cons:

  • If you deposit a paper check in an account at a financial institution or onto a prepaid card, you may not be able to use the money right away.

  • Paper checks may be lost or stolen before you can deposit or cash them.


Direct Deposit

Pros:

  • Often the fastest and safest way to get your pay.

  • Funds are usually available immediately.

  • Reduces trips to a financial institution.

  • It may be easy to automatically split the direct deposit between a checking and savings account, which can help you build savings.

  • You don’t have to pay fees to cash a paper check.

  • Some financial institutions may waive some of their account fees if you have a direct deposit.


Cons:

  • There may be fees associated with the account the direct deposit goes into, although many financial institutions offer “safe” accounts that have no or low fees.

  • Not offered by all employers or public benefit providers.



Payroll Cards (Prepaid Debit Cards)

Pros:

  • Safer and more secure than carrying cash or checks.

  • The payroll card has full federal consumer protections for funds taken by error or theft.


Cons:

  • There may be fees associated with the card, such as to use the card or if you don’t use the card frequently.

  • Requires some extra effort, and possibly fees, to get cash when you need it. You can find out about fees associated with the card by reading the cardholder agreement that likely came with the card. You can also review the information online at the provider’s website. Some users of payroll cards avoid card fees by transferring the full amount of their pay from their payroll card to their financial institution account shortly after the money is available.

Tracking your income

Most people receive income from multiple sources. You might have more than one jobs, receive benefits, or receive gifts. Making a list of income sources can help you plan how you will save, share, and spend your income.

Understanding where your income comes from and how much comes from each income source is very important. Income sources can be categorized into three types:


  • Regular income refers to income you can expect to receive every week, every other week, twice a month, every month, or on some other regular schedule. Regular paychecks and Social Security Disability Insurance (SSDI) benefits are examples of regular income.

  • There is also unpredictable income. This is income that varies in amount and/or timing. Pay from hourly work may be unpredictable if the hours vary from week to week. Here’s another example. Some people may only receive child or spousal support payments sporadically and in varying amounts, even though they are supposed to be paid regularly.

  • Seasonal income may be predictable, but it comes only at particular times of the year. Perhaps you always receive money from a friend or family member around the holidays. Or you may sell crafts at a fall festival in your community or be employed as a package delivery driver during the winter holidays.

  • You may also have one-time income that you only get once. An example is pay you receive from working one-time jobs, such as helping people move.

Conclusion

Understanding your income is the first step to budgeting so you can meet your needs! Knowing how much income you receive and where it comes from is extremely important.



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