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Earning and Spending Income

We strive to earn income so we can use the resources to meet our needs and dreams. This page introduces basic thoughts on earning and spending income.

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The primary source of cash inflow for many individuals is the money they are paid for their labor

There is a difference between cash inflow and income.  Working at a job generates a payment that is considered both cash inflow and income.  A gift of cash from a relative is a cash inflow but is not income, for example.  Cash inflow is all cash that you receive; income is the return you receive (earn) for your efforts, such as working at a job or investing in a business.

 

The basic principle of being an employee and being paid for one’s labor is that “I am willing to offer my labor in exchange for a payment – I am willing to be your employee and to work for you.” 

The agreement between employee and employer is a legal contract even though you may not sign a document that appears similar to other contracts, such as an apartment lease or vehicle lease.  The law also takes a “somewhat different” approach to enforcing an employment contract because no one wants an employee who does not want to be there.  Nevertheless, the agreement is a legal contract.

 

Being paid a wage usually describes a situation wherein employees are paid for each hour they work; that is, the worker and employer agree that the employer will pay the worker (employee) a specified amount for each hour of work.  Someone in the relationship agrees to keep track of the time worked and the employee is paid at specified intervals, such as weekly, once every two weeks, twice a month, etc.  State law sometimes specifies a minimum frequency a worker must be paid, such as twice a month.

 

State law also requires that employers pay employees an additional amount if an employee works more than 40 hours a week (a week is defined by law as Sunday through Saturday).  This extra pay is referred to as overtime.  For example, rather than being paid $17.00 per hour as an individual's regular hourly wage, for each hour over 40 hours worked in a week, the employee is paid $25.50 (“time and a half” or 50% more than the regular hourly rate).  See http://www.nd.gov/labor/laws/46-03.html, for example.

 

A salary, by contrast, is a set amount of pay for a specified time.  For example, the employee is paid $2,850 as a monthly salary.  If the employee works more than 40 hours in a week, the salary is not altered or adjusted for the additional hours worked.

 

Employees receive a payment for their labor, often as a check or a direct deposit into a bank account.  The employee could 1) convert the check into cash or 2) withdraw the payment from the account, hold cash and spend the cash when needed.  A more common and safer practice is to have the money deposited in a bank account and to withdraw the cash as needed.  Depositing cash in a bank account is safe and may possibly earn a slight amount of interest. 

 

The bank account is perhaps a checking account (an account from which the bank allows you to withdraw by writing a check).  Checks are documents that you (the payer) give to someone as a payment (the payee); the check directs the bank to transfer funds from your account to the payee.  When your checking account is empty, the bank will not make payments even though the payee has received a check from you (referred to as an overdraft). 

  • The bank may charge fee if the depositor writes a check when there is insufficient funds in the account; likewise, the payee may attempt to add a fee to the payer's obligation if the payer gave the payee a check when the payer did not have adequate funds in their (payer's) account to cover the amount of the check. 
  • Do not "bounce" a check.  It is poor money management.  If you do not have the money, do not make the purchase.  If you need to make the purchase, arrange to borrow before making the purchase.

 

A debit card works similar to a checking account except you direct the bank to transfer the funds by using your debt card rather than a check.  Like a checking account, the bank will not – cannot – transfer funds from your account if you have no funds in your account.

 

Individuals also can authorize the bank to automatically pay a bill, such as, instructing the bank to pay a monthly utility bill without having to be directed each time with either a check or a debit card transaction.  These automatic payments generally are arranged by the customer authorizing  the seller, such as the utility company, to indicate to the customer's bank to monthly pay the customer's "bill" from the customer's bank account.

 

Employees receive more than cash from employers; employment benefits often can be a major consideration in deciding whether to accept a particular job.  Some benefits include

  • health insurance (for the employee or the employee and family); if your employer does not provide insurance, you need to determine how the Affordable Health Care Act applies to you; see http://www.hhs.gov/healthcare/rights/index.html
  • allowance for time off (i.e., annual leave or vacation time)
  • allowance for time off when ill or when a family member is ill (e.g., sick leave); also see Family & Medical Leave Act at http://www.dol.gov/whd/fmla/.
  • certain days off from work as holidays
  • a minimal amount of life insurance at the employer’s discretion
  • disability insurance – makes a payment to a worker who is no longer able to work due to a disabling illness or injury; the amount of payment is usually based on the amount that was being earned at the time of the disability but the payment is less than amount being earned, maybe 60% of amount being earned, for example
  • A contribution to an account for the employee’s retirement at the employer’s discretion
  • worker compensation -- If an employee is injured while working, workers compensation pays the medical expenses due to the job-related injury; state law requires employers to provide workers compensation; see http://www.workforcesafety.com/library/Documents/brochures/EmployersGuideWC.pdf
  • unemployment insurance – a payment to a worker whose job was terminated; it provides the unemployed worker some income until the worker is able to find another job; state law requires employers to pay unemployment tax; see http://www.jobsnd.com/unemployment-business/learn-about-taxes

 

Employment benefits also can include items, such as use of a vehicle for your work activities and an opportunity to pay for using the vehicle for personal purposes.

 

Employee v. independent contractor -- Most workers assume they are legally considered their employer’s “employee” but some employers arrange the relationship so the worker is an “independent contractor”, rather than an “employee.”  Employer’s may prefer having workers considered independent contractors (rather than employee) because most state employment laws apply to employers/employees, but do NOT apply to employers/independent contractors.  Most workers would prefer to be considered employees due to the protection/benefits (e.g., overtime, workers compensation and other legal mandates) offered by employment laws.  See http://www.nd.gov/labor/contractor/index.html

 

A critical question is distinguishing between an employee and an independent contractor.  One way to begin thinking about this legal distinction is that an employer controls the details of an employee’s work, whereas an independent contractor controls the details of their own work.  Bottom line – who is controlling the details of the work?  The employer – then the relationship is employer/employee.  The employee – then the relationship could be considered an employer/independent contractor arrangement.

 

Gifts also can be a source of cash inflow even though they are NOT income.

 

 

Cash Outflow

To state the obvious -- we use cash to make purchases.  These cash uses are cash outflows.

 

Common expenditures or living expenses include housing, utilities, food, gas, transportation, entertainment, clothing, life insurance, and the list goes on.  It is helpful to consider whether the expenditure is a necessity or a discretionary expenditure.

Necessities – what do you truly need:  housing, food, clothing, health insurance if not provided by your employer.  It is not easy to avoid the cost of necessities.  Taxes also fit the concept of necessity in that you cannot avoid paying taxes.

Discretionary expenditures – buying or using your cash (your income) for items other than necessities; for example, entertainment, travel, additional clothing, meals away from home, and the list goes on. Discretionary expenditures are the first items to consider if you want to change how you use your cash/income.

Ask yourself:  is this item a necessity or something that I “really want”?

Discretionary income is the income remaining after necessities have been paid.

 

Savings – cash that accumulates because cash inflow exceeds cash outflows

 

A goal:  spend less than you earn – regardless of your level of income!!

 

Keep records – write down amounts received and spent.  Record your cash inflows and outflows.  From these records, you can begin to understand where your cash is coming from and where it is going.  You also can use these records to complete your tax return or assemble information if you apply for a loan, such as a home loan.

Keep track of the automatic payments you have authorized so your have a reminder as to how you have your financial affairs organized.

 

Budget – project cash inflows and outflows, and plan how to spend or save cash income.  Plan how you will spend your money and then see how close you can get to reaching that ongoing goal.  Include “savings” as part of your budgeted financial commitments (sometimes expressed as “pay yourself first”).

 

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