Personal Financial Planning – Earning Income (IV)

Over the last few weeks, we have taken up several issues on earning income, including the two major income sources. Today, we will step back a little to discuss why earning income is crucial and fundamental to all aspects of personal financial planning in the first instance, and consequently our lives. In my retirement planning […]

Over the last few weeks, we have taken up several issues on earning income, including the two major income sources. Today, we will step back a little to discuss why earning income is crucial and fundamental to all aspects of personal financial planning in the first instance, and consequently our lives.

In my retirement planning programmes, which is an aspect of personal financial planning, I often conduct an exercise in which I ask participants to confirm whether or not they know, to the nearest one thousand Naira, how much they earn on a monthly basis and how much they spend on grocery, fuel for vehicles/power generators, gifts to needy relations and friends, etc. Always and always, it is an insignificant percentage of those in attendance who know how much they earn and spend monthly. (To be sure, people, particularly employees, tend to know a little bit more about their earnings because their monthly is pretty constant. But then they do have other sources of income and may not know how much they fully earn.) The point is that it is wrong not to know to a reasonable degree of certainty how much we will earn periodically. Even for entrepreneurs and self-employed persons whose earnings can be irregular, it is important to have a good idea ofperiod earnings and plan accordingly. This, by the way, can be done if some salary and benefits are specifically earmarked from the business to the owner on a periodic basis.

There are many benefits of earning income. These can be broadly grouped into psychological, economic and social benefits.

Psychological benefits refer to the feelings of self-satisfaction and confidence that making sufficient income gives us. I mention this as the first benefit because it is the foundation of everything else.Feelings of financial independence, opportunities fora quality and healthy life, and opportunities to enjoy the best things that we like all add up to make us happy with ourselves.

Economic benefits refer to the economic opportunities that earning income creates for us. For instance, our income streams can be the justification on which we can borrow from a lending institution and invest in a profitable business, making it possible for us to both repay our loans and also earn additional income and create wealth that we probably could not otherwise.

Social benefits are probably tangentially related to both psychological and economic benefits. Earning income earns a certain place for us in the society which can end up creating more economic opportunities and consequential psychological benefits.

Specifically,

Income is required to pay for our basic needs: The income we earn is what makes it possible for us to pay for the basic needs of our lives and the lives of our loved ones. We pay for the food we eat; pay our rent and utilities; clothe ourselves; pay for the education of our children; pay for our health insurance, and generally be able to take care of our health, etc. These are the basics of decent living.

Income makes it possible for you to pursue the larger goals of life: I am sure we understand that we need certain minimum levels of comfort and inner peace to be able to think large, plan big, and confidently face the day. A hungry person would hardly be in the right state of mind to plan on going to get more education or setting up a business or charity organisation. Earning income gives us the peace we require to begin to plan in ways we would otherwise not be able to.

Income is our first step towards creating wealth: Beyond our subsistence requirements, the income we earn is the first step towards building wealth for ourselves. Curiously, it is not about large quantum of monies we are starting with. Rather, it is those baby steps we make gradually over time that really matter. First, baby steps, like saving little amounts towards investing in an asset or starting a business instils several dimensions of discipline that are required in financial success. Second, it forces us to plan for what we need and begin to work towards realising a set target; Third, it teaches us to delay small immediate gratifications for larger future payoffs, etc.

Income makes it possible for us to be of benefit to others: Our ability to be of value to others, outside our commercial interests, is dependent substantially, amongst others, on the state of our finances. With a great state of finances, we can do many things to help and support others. Individuals and organisations with a good state of finances are able to offer social and economic services to others. These may include feeding programs for the needy; payment of school fees of brilliant but indignant pupils; provision of seed capital to smart and budding entrepreneurs, etc.

We pay taxes on our incomes: Paying taxes on our incomes is a civic duty that makes us contribute to the overall success of our nation. Income taxes from individuals and corporations are a substantial component of government revenues. Earning income and paying taxes on them to government is another way we help develop our nation as government uses such revenues in providing security, education, roads, etc.