Fixed Income: What They Are, Importance, Types, And Examples Of Ordinary Income In A Budget

Fixed Income: What They Are, Importance, Types, And Examples Of Ordinary Income In A Budget

Fixed income is the money that we use regularly to cover our basic living expenses, such as food, utility bills, etc. They essentially result from our daily work and the fixed payment we receive, such as salaries, wages, commissions, and even the rent of real estate. But let’s learn more about the characteristics of ordinary income and why they are so important for our personal savings budget.

The common citizen depends on his work and his ordinary income to support himself. He buys bread for dinner or gasoline for his car thanks to the salary or wages he earns and in general, a person can live in peace by covering this list of basic expenses that we will explain in detail with his fixed income. However, some financial experts recommend having multiple sources of income to help cover unforeseen events and costly needs. To help you, we inform you about the definition of an income budget, which includes a list of family expenses and some examples of income and expenses.

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What is fixed income?

A fixed income, also called ordinary income, is any resource that is received at regular or uniform intervals and that is obtained through work, trade, or the allocation of profits. It is the invariable and predictable inflow of money to cover essential needs.

Especially it is related to most of the money that an average person earns in remuneration for some work activity or service, either through a contract with a company or person; or self-employment if you own an income-generating business.

Thus, fixed income includes hourly wages, weekly, biweekly, or monthly wages, tips, commissions, pensions, interest on bonuses, ordinary income from a business, rents and royalties, short-term capital gains, and dividends not qualified, among others.

This type of income comes in two forms: personal and business. In a corporate setting, it results from regular day-to-day business operations and how many kinds of income a business can have, excluding income earned from the sale of long-term capital assets such as land or equipment. This cash income is subject to the standard marginal rates of income tax according to each country and legislation.

Ordinary income is part of every personal budget that also includes the fixed expenses that must be covered by any person to support themselves and live in society. Now, what are the types of expenses? Personal spending is the money that is used for maintenance, that is, food, clothing, entertainment, payment of services, and other bills for education, health, insurance, and special loans, which are examples of personal expenses. There must be a balance between income and expenses so that there is an effective and healthy financial budget.

Variable Income

In addition to fixed income, a personal budget can include variable and occasional resource inputs. Variable income does not have the periodicity characteristic of regular income, they can be unexpected and variable in amount and time of receipt, nor are they contemplated in the plans and daily expenses, rather they are usually used to pay for medical or other emergencies, vehicle/home repairs or maintenance, pending vacations or trips, etc. Let’s differentiate how the most frequent revenues are classified:

  • Fixed income: According to the meaning of income, it is the amount of money that does not change over time such as wages and salaries, allowance, commissions, income obtained from the business, etc.
  • Variable income: is the amount of money that changes over time or according to a situation and can be fees and interest on investments, bonus payments, dividend payments, interest on savings, and free meals.
  • Occasional income: they are also variable and unforeseen; this is the case of gifts, lottery prizes, or other types, of inheritances.

Fixed Income Types

Financial experts agree that for the effective coverage of basic living expenses, the possibility of a more comfortable and secure quality of life depends on the sources of income that we have. These can be multiple and regular, here are three types of fixed income and their impact on people’s financial health:

Income from work

It is almost always a person’s main source of income, it comes from some salary or the profits produced from their business. In the first case, it is an income that is not very variable in terms of increase, it remains at a fixed rate for long periods and requires effort in overtime to achieve its increase. Its advantage is that it is a safe and predictable contribution that allows the planning of its adequate expenditure.

This type of income can also be achieved through the hourly work contract, in some cases in which the person performs a trade or provides services, and is compensated by commissions and daily tips. Tax deductions, which are also examples of expenses in the case of permanent contracts, are generally made by the employing company or organization.

Investment Income

This type of income is generated by the increase in the value of an investment or capital gain invested, that is, in the case of the purchase of shares and their subsequent sale at a higher price; or in the case of the purchase and sale of a home or real estate.

The income generated by the commercial transaction is called a capital gain, it is not cash or regular money but it accumulates over some time and can be liquidated at the time you need it. Also, this type of income is more tax efficient compared to earned income.

It is a good alternative to cover necessary expenses that require a high injection of resources, such as in the case of paying health or life policies, emergency coverage, job retirement, vehicle purchase, or solving any important unforeseen event.

Passive income

Passive income is money you earn regularly without having to put in the time or effort to earn it. It shares the characteristics of both earned income and investment income; Since it is paid periodically, however, the amount of income does not depend on the number of hours or effort dedicated, but exclusively on the capital invested.

Typical examples of passive income are rent, interest, and dividends, which are paid through stocks and bonds.

Taxes on this type of income are also lower compared to earned income. Some income such as dividends is entirely tax-free in the hands of the investor.

It is always advisable to invest funds as a second source of income, which can cover contingencies or unexpected situations, in some cases it will guarantee a calmer and more secure retirement, the possibility of financial stability or future inheritance for your family or when for some reason you are unable to earn income from your regular job.

Fixed Income Examples

An income is any way that people earn money, and there are many ways to consider it. Some must work hard to keep it going, others use their own money to get the job done without much effort. Already aware of what a list of personal expenses and the most frequent types of income contemplate, here are some examples that generate the entry of money into our accounts:

Wages and salaries

Salary is the remuneration or payment that a person receives in exchange for their work or professional service. It is a variable amount since it is calculated based on the time worked, which can be stipulated in hours or days. It is the main example of family income, because, for many people in the world, it is their main and only source of income, in which an hourly rate is paid to complete established tasks.

On the other hand, the salary is the monetary compensation or fixed payment that a person receives for a job established in a long- or medium-term contract. It is the remuneration received from an employer for the performance of a position or service during a certain time, annual contracts are usually established for a regular amount with the payment agreement, whether weekly, biweekly or monthly.

Commissions

Commission money is earned for completing a task, often used for sales-related jobs. Commissions can be established as a fixed amount of money earned for each sale made or receive a percentage of the sale price of your work, so both modalities are based on results and not on the time spent.

Some people can earn as a commission an additional fixed amount of money for agreements for additional services; For example, a hairdresser who receives a basic salary can earn a commission if she manages to sell business products such as shampoos, conditioners, hair dyes, etc. to clients. People who work in services also receive commissions as tips in addition to their salary.

Investments

Investments in property, stocks, and works of art can provide you with cash inflow through an increase in their value (capital growth) or the amount of money for each share you own or dividends. Another way to benefit from investments is through the rental or rental of properties, for which a fixed payment is received through the contract for the use of a property.

Allocation of money or pensions

Pensions are fixed payments received by a retiree or person who has completed the work cycle established by law for it. In addition to covering the retirement of a worker, the pension is also an economic benefit intended to protect the worker in the event of an accident at work or in the event of an accident that prevents him from continuing to carry out his professional duties. Some governments issue this type of assistance payment to people who are temporarily unemployed, disabled, or adults over 60 years of age.

The interest generated by your money deposited in a bank, although it varies according to the entity and type of account, can also be considered among the fixed income that many people with savings capacity have been able to take advantage of. Everything is based on the organization of the ordinary income and also on the opportunity to multiply the variable income that we sometimes receive; to build a successful and healthy financial trajectory, which also allows us a satisfactory present and guarantees us a happy and secure future.

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  • Fixed Income: What They Are, Importance, Types, And Examples Of Ordinary Income In A Budget

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