Definition of income (accounting): Income is also known as revenue or turnover, and represents the amount of money a business earns by providing products and services to customers.
Definition of income (personal finance): Income is any cash receipt which results in a net transfer of wealth to you.
What is income?
In this article, we’ll focus on the personal finance definition of income, which relates to cash receipts which increase your net wealth.
Individuals can measure their income before tax and after tax.
Pre-tax income is used when looking for jobs, as salaries are advertised as a pre-tax, or ‘gross’ figure.
Post-tax income is useful when creating a personal budget, as it represents the amount of cash you will actually receive on payday, and thus your maximum spending limit before you run out.
What types of income are there?
It is possible to analyse the nature of income between active income and passive income.
Active income is earned through providing labour, usually at an hourly rate or an annual salary. Each unit of income is earned through a trade-off between your time and effort, and remuneration received in return.
Active income could include:
- Self-employment earnings (e.g. taxi driver)
- A weekly paycheck from a part-time job
- A monthly salary
Passive income is received independently of your labour. Examples include:
- Dividend income
- Rental income
- Interest income from a bank account or investments in corporate bonds
- Royalty income
- Income from automated online businesses, such as affiliate marketing
- Government or private pension income
It’s worthwhile pointing out that while passive income is indirect, and cannot be connected directly to labour you have provided, this doesn’t mean that they don’t require upfront effort.
For example, to earn royalty income, you would need to write a script or song in the first place to entitle yourself to royalties.
What isn’t counted as income?
Here are some cash inflows which are not treated as income from a budget or personal finance perspective:
- Cash obtained through a debenture, bond, loan or another borrowing. This needs to be paid back, therefore no net increase in wealth has occurred.
- A cash windfall won through gambling or a game of chance.
- A refund of a previous expense. This should be treated as a reduction in a cost, rather than income.
How is the word income used in a sentence?
What else you should know about income
The average household income in the UK is approximately £30,000. This figure is based on wages after tax.
How does the definition of income relate to investing?
Your income level can have an effect on the investing options available to you.
If you have a higher income and are able to save a very decent portion of your salary each month, you should consider taking an investing course and risk appetite questionnaire to ensure that you’re making the most of your investment opportunities. If you’ve like advice from a professional, you might want to find a financial adviser.
If you have a lower income, you can still invest and enjoy great returns. Have a look at how I would invest £1,000 and my tips for investing small sums of money. Instead of courses, consider investing books as a way of building your investing knowledge, as their low prices won’t make a dent in the amount you’ll be able to invest.