Personal Financial Planning – Earning Income (I)

So far, we have been clear that the purpose of personal financial planning and management is to create legitimate, sustainable and growing wealth in line with our individual aspirations. Thisinvolves three things:

1. Earning income
2. Managing expenses
3. Building assets for more income and capital appreciation

Earning Income: The starting point for successful personal financial planning and management is identifying sources of earning income. Income refers to the money you receive for the value you create, typically represented by the goods and/or services you provide. Often, income for many people is their total earnings in the form of wages and salaries. It could also be the profits earned from their sole proprietorships, returns on investments, pension payments, capital gains, etc. We will be taking up different sources of income at the appropriate time.

Gross income is the sum of all payments you personally receive as salary, allowances, interest or profit share earned, rental income, etc. Net income refers to the income left over after deducting taxes, fees, commissions, etc.Your discretionary income is the amount you have available after paying for all necessary expenses such as feeding, transportation, etc. out of your net income. Note that your taxable income will be your total revenues that are taxable for your circumstance and jurisdiction.

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Understanding Income: Income sources are quite honestly literally endless. But each of us is able to only earn to the extent of the following:

1. Knowledge about the income source(s)
2. Our ability to seize the opportunity by successfully putting in the required resources
3. Personal, legal, and/or other subjective limitations and/or restrictions

Knowledge about the sources: There are many sources of making income. We should, however, be guided by the following principles:

1. Legitimacy of what we do and what we earn
2. Our skills
3. The quantum of what we may be able to earn

Legitimacy refers to the legality of our income sources. No matter what we do, we should ensure that our sources of income are legitimate. They should not put us in any way in violation of our local and international laws. Similarly, whatever we do to earn income should not hurt others.

Our skills and knowledge are very important in influencing, determining and shaping what our choices are. The work we do and how we do it is substantially determined by our knowledge and skills. The implication of this is that we need to build the required knowledge and skills for any career, business and investment choices we need to make. It goes without saying that if we do not have the knowledge for a job or the skills for some investment or business, then we do not have a good chanceof making money in that endeavour.

What we can earn, therefore, is largely determined by the Legitimacy of what we do and what we earn, our skillsand our ambition. This means we need to be clear about what we want to earn on a monthly and annual basis as well as in the long run. Having such clarities makes it necessary for us to plan in great detail as to how we can practically earnour desired income levels.

We need to be clear about our financial and life needs and goals. We need to think through our options and how we can go about actualising them over various time frames.  One of the key secrets to knowledge about the sources of income and growing them is through starting as early as is practically possible and gradually scaling up. Substantially, success in long-term financial planning and management comes through investments and benefiting from the power of compounding over time. Consistent contributions to investment accounts set you up for financial success in a matter of time.

Personal ability: Our ability determines what we can earn. Ability here refers to the sum of all the resources that help us in creating the value that others can pay us for. As mentioned earlier, such value might be created through the application of our mental and physical efforts as employees; or by providing location utility when we sell our goods at a Cornershop; or by making capital available to an entrepreneur by investing, etc. It could be derived through relationships that we have and which we can leverage. In short, our technical knowledge, skills, emotional dispositions, connections, financial and non-financial assets, etc. all add up to what makes up our abilities.

Self-discipline is required to achieve the financial discipline necessary for earning income and growing income. Self-discipline is the ability to understand our thought processes and take control actions for the follow-through of decisions. For instance, if you want to build some amount of savings for the purpose of making an investment, it may require that you make certain concessions, perhaps sacrifices, over a period of time. Self-discipline is important because it makes it possible for us to keep our finances under control often by delaying gratifications for the purpose of achieving our long-term goals.

Generally speaking, we apply our abilities towards drawing up a budget and a plan for achieving our short-term and long-term financial goals, which are, obviously, intricately linked to our life goals. This will involve knowing what we will be making our money from, how much we will be making, how we will be making money, how much we will be taking to maintain ourselves and our families, how much we will be committing towards savings and investments, etc.