Challenge

Day 2: Your Income Number (30-Day Financial Wellness Challenge)

Income is money received from wages, interest and dividends, and more.

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Day 2 - 30-Day Financial Wellness ChallengeYour income number is one of the important financial vitals.

Welcome to Day 2 of the 30-Day Financial Wellness Challenge.

Each day will comprise of financial exercises, some short and others a bit longer, to help you become financially fit. The goal is to tackle different aspects of personal finances one day at a time.

After the 30 days, you’ll have a stronger understanding of your financial health and an action plan to improve your financial wellbeing. Review Day 1: Net Worth.

On Day 2, we’re going to tackle Your Income.

Income is money received from wages, interest and dividends, capital gains, rental units, babysitting services, and more. It can be received on a regular basis such as a paycheck, monthly interest, quarterly dividends, and infrequently through on-demand services or profit from the sale of assets.

So, how can you calculate your income? You can use gross income which is the amount before taxes and contributions are taken out of the paycheck. Or if you prefer to use net income which is the amount after taxes and contributions.

Before we jump into the challenge, let me share the different types of income categories and streams.

Income Sources and Streams

For some people, income can come from different places. It’s important to understand the differences. Knowing the various ways money can flow into your life can profoundly impact your financial wellbeing.

All income can be described as either active, passive, or portfolio. Active income is from any service or performance-based activity. This includes money from a job, tips, commissions, and bonuses. Whereas, passive income is received from limited activity. It doesn’t require your daily and active participation to generate income. And portfolio income can be considered a subcategory of passive income. But it’s important to make a distinction as it’s treated differently by the IRS.

Learn more: Active Income vs. Passive Income Defined

Now, that you have a good understanding of income categories, I want to introduce you to the different types of income streams. They are:

  • Earned Income: money earned from exchanging your time.
  • Profit Income: money earned from selling something.
  • Interest Income: money earned from lending to others.
  • Dividend Income: money earned from profits as a shareholder.
  • Rental Income: money earned from rental properties.
  • Capital Gains: money earned from the growth of assets.
  • Royalty Income: money earned from licensing your work.

These income streams can fit one or more of the income categories. I want you to become familiar with them. This will help you list and calculate Your Income number and be useful for the Earn More Money challenge day.

To get started, answer the following questions: what is your primary source of income? how much do you make and how much do you actually take home? do you receive money from other activities or investments?

What’s Your Income Number?

Your Income Number is a list of all the sources and amounts of money you earn on an annual and monthly basis.

For the purpose of today’s exercise, we’ll use gross income which is before taxes, deductions, expenses, or contributions are taken. We’ll discuss net-income when we calculate your monthly cash flow as we progress through the challenge.

For most, wages from one job is the only source of income. So calculating gross monthly income is simple.

Your annual salary

What’s your annual salary? For salaried employees, that should be an easy question. But if you don’t know your annual salary, take a look at your paystub for your gross income per paycheck. Then multiply the gross income by the number of times you get a paycheck in a year.

For example, if your gross paycheck is $2,083.33 and paid biweekly, multiply that by 26. Your gross annual salary is $50,000.

If you don’t receive money from any other sources, then your income number is $50,000.

For hourly employees, to get your annual income, multiply your hourly wage by the number of hours you work each week. Then multiply the total by 52 (weeks).

For example, you are paid $10 per hour and work 40 hours per week, your gross weekly gross pay is $400. Multiplying that by 52 weeks (including a paid 2-week vacation), you’re annual gross pay is $20,800. You’ll then divide that by 12 (months) to get your gross monthly income which is $1,733.33.

Totaling all your income

If you have other sources of income, then you’ll want to add those to your calculations for a more accurate gross income amount. Income generated from other activities is typically pre-tax dollars which requires you to pay the associated tax when you file your taxes. So you’re already working with gross income amounts.

Sit down for a few minutes. Think about all your income sources. I also recommend looking at your accounts to identify recurring deposits you might have forgotten.

What calculating your income number reveals?

Your Income Number helps determine your ability to meet monthly expenses and achieve financial goals. This number will also be used to calculate your debt-to-income ratio as well as useful in cash flow analysis.

Day 2 Assignment

Let’s complete Your Income List.

  1. List your income sources
  2. List your income amounts
Income ListAnnual $ Amount (Gross)Stream Type
 Active Income(how much do you make?)(earned, profit, interest, dividend, rental, capital gains, royalty)
  Primary Job$
  Part-time Job$
  Other Job$
  Side Hustle:$
$
$
 Passive Income$
  Interest income (savings)$
  Rental Income  (rental property)$
  Business Income (non-active)$
  Royalties$
  Other:$
Portfolio$
  Dividend Income$
  Capital Gains$
  Other:$
Total Annual Income ($)$
Total Income Sources (#)Tally the # of income streams
Total Monthly IncomeDivide Total Annual by 12

Your Income Number Tips

  • Calculate your income
  • Identify your income dependency
  • Calculate your net monthly income. Net monthly income is the actual cash you receive on a per month basis.
Your Income Number
   Total Annual Income $
   Total Income Sources
   **Net Monthly Income$

Why is calculating Your Income important?

  • The most accurate picture of income sources. It helps you understand how money enters and the amount of money that flows into your life.
  • It helps with financial security. A focus on creating a strategy to diversify and multiple income sources.

Additional Reading

  • Personal Capital is a free personal finance app with a 360-degree view of your money. With Personal Capital, you can see all your accounts in one place with planning and analysis tools.

Next Daily Challenge: Day 3 – Expense Statement

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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