Income Lesson

I think most of us would agree that income is one of if not the most important part of a personal financial plan. Your earnings can be passive or earned. Passive comes from investments such as stocks, bonds, mutual funds, real estate etc… Earned comes from a regular fulltime job or a business. There are other sources such as alimony and child support. Earnings whether passive or earned require specific skills.

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I think the first step is to look at your sources of earnings to see if you are taking advantage of all that’s available to you. You may have a regular full time job but you may not be investing any of the earnings from that job allowing that money to work for you. I think it’s wise to have a combination of both passive and earned wages unless you were born rich and can live off the earnings from your inheritance. Normally we have to have a regular full time job to pay our bills and hopefully we can save at least 10% of our wages. That 10% should start generating our passive wages by earning interest or dividends. As you read through the lessons you will notice I talk about saving at least 10% of your earnings and increasing your savings as your wages grow. This is so important because as you reach retirement age you will start to depend more on your passive wages than your regular earnings.

Some of you may be earning your income or at least planning to earn your income by creating your own business. There are many options available to you to start a business. The key is to find a business that you like because you will be spending a great deal of time running the business and you will have to wear a lot of hats. Most small businesses start off with very little cash and a great idea. There are many businesses that you can start with a small amount of cash and a lot of your own labor but you need to be careful about any venture that claims you can get rich over night by simply doing such and such. Trust me there aren’t any businesses like that available and if they were the person wouldn’t be telling you about it they would be doing it themselves and wouldn’t need your money. There are many businesses you can start over the internet if you have a good idea or product to sell. I recommend Site Build It because they help you build your website and you don’t have to be a trained webmaster. One of the largest expenses of any business outside of labor is advertising because you can have the greatest product in the world but if people don’t know about it you won’t sell anything. Site Build It helps you with advertising because they teach you how to use content to help people find your website when they search for keywords that relate to you site’s topic. The great thing about this type of website is people find you without you having to pay huge advertising cost. This is a great way to invest your labor and get a great return on your investment. If you are interested in starting an internet business I recommend you check out SBI!!!

To create passive income you need to have some specific skills such as the ability to create a savings plan, to budget, an understanding of asset allocation, and risk reward analysis. We have already talked about a savings plan and the fact that you should pay yourself first and save a minimum of 10% of your income. When you create your budget you have to make sure you include your saving plan and make sure you have enough cash flow to cover your bills and your savings. It’s also important that your savings grow as your income grows and at some point we hope that your savings start to grow faster that your income because as you maintain your expenses at a certain level but grow your income you will be saving more.

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Asset allocation is a fancy way of saying don’t put all your eggs in one basket. When you start investing you have to consider your risk tolerance and your goals to figure out the type of investments you want to invest in as well as how you want to allocate your money so you don’t risk loosing it all in one bad investment. If you are young and have a long time horizon you may want to allocate your portfolio 50% stocks 25% in a balanced mutual fund, and 10% in bonds and 15% cash. This is only an example you should evaluate your personal situation and consult with your investment professional to determine the proper allocation for you. As you pick your investments be careful to make sure the risk of the investment doesn’t out weigh the reward. The more risky the investment the greater the reward should be. It’s also important to know your exit point when you get involved with an investment because if you stay in a bad investment you can loose all of your money or if you get greedy and don’t get out of a winning investment in time you can loose all of your gain. Like everything else we have talked about you have to have a plan and you have to execute that plan.

Retirement Finance Lesson

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