What is Income?

Terminology to be discussed:

• Personal Income

• Employment Income

• Investment Income

• Gross Income

• Disposable Income

• Discretionary Income

IncomeIncome• Money that an individual or business receives

from various sources, such as:

wages or salaries for an individual

Sales for a business

Interest

Dividends

Types of Personal Income

1. Employment Income• Salaries and wages• Commissions (earn a fixed % of a sale amount such as

3% on a sale of a $400,000 house which is equal to $12, 000)

• Piecework (earn a fixed amount per item produced)• Profit sharing (earn fixed % or amount of a business’

profit)• Benefits such as medical insurance, paid holidays, paid

sick days, drug plan and dental benefits.

2. Investment Income• Dividends• Interest from savings accounts or other types of banking

investments

Gross Income3. Gross Income• The total amount of income received by a person.

• AGI = Salary + Commissions + Dividends + Interest Earned• ANNUAL GROSS INCOME = 90 000 + 10 000 + 1000 + 500 = 101 500

Salary

Commissions

Dividends

Interest

$ 1 000

$ 90 000

$ 500$ 10 000

Gross Income

• Annual Gross Income = $101 500• Monthly Gross Income = $101 500 / 12 = $8458.33

BUT… You don’t take home or actually receive this amount.

WHY… Deductions are made from your gross amount.

Any many people would respond…But why

Gross Income Deductions

• Of the 90,000 gross salary, deductions are made as some of the money will go towards paying:

1. Federal income tax 2. into the Canada Pension Plan (CPP) 3. into government Employment Insurance (EI) 4. for any job benefits such as health

insurance, a company’s pension plan, union dues, life insurance, etc.

Take-Home Payaka – Disposable Income

• After deductions actual take home pay (disposable income) of $90 000 may be:

• Additional provincial taxes would also need to be deducted.

Gross Salary Take-Home Pay

Annual $ 90 000 $ 49 000

Monthly $ 7 500 $ 4 083

4. Disposable IncomeThe amount of income that is left after taxes have

been paid and any other deductions are made to gross income.

Example:Disposable Income = Gross Income – Federal

Taxes – Provincial Taxes – Property Taxes – EI Benefits – Health Benefits – Pension Deductions – other)

2010 Federal Income Tax Brackets

Taxable Income Tax on this income

$0 - $10,382 Nil

$10 382+ - $40 970 15%

$40 970+ - $81 941 22%

$81 941+ - $127 021 26%

Over $127 021+ 29%

Canadian Revenue Agency. “What Are Income Tax Rates For Canada 2009.” 24 August 2009. 16 February 2010 <http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html#provincial>

2010 Ontario’s Tax Brackets

Taxable Income Tax on this income

$0 - $ 37 106 5.05%

$37 108+ - 74 214 9.15%

Over $74 214 11.16%

Canadian Revenue Agency. “What Are Income Tax Rates For Canada 2009.” 24 August 2009. 16 February 2010 http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html#provincial

Gross vs Disposable (Take-Home) IncomeExample

Gross Disposable

Annual $ 101 500 $ 57 510

Monthly $ 8 458.33 $ 4 792.50

Note on Taxes

• Actual taxes and deductions may vary depending on a number of additional factors such as:

1. charitable donations

2. union dues

3. other pension payments

4. other forms of income received

What do we spend Disposable Income On?

1. Necessities in life - Life’s financial responsibilities

- Mortgage payments, food, car payments, insurance, electricity, etc.

2. Discretionary purchases– Wants and luxury items– Vacations, eating out, the latest TV technology.

5. Discretionary Income

Money left over after paying for necessities that can be used to purchase luxury items

Budgeting

Budgeting• How we allocate or

distribute our disposable income amongst necessity spending and discretionary spending

2000

500

300

150

300

500

200 133

Mortgage

Savings

CarPayment

CarInsurance

House

Groceriesetc.

Clothing

Disscretionary

Personal Money Management

Why We Buy?

Five key factors that influence consumer buying decisions:

1. Disposable Income and Price 2. Status 3. Current Trends 4. Customs 5. Habits and Addictions 6. Promotions

1. Disposable Income

• A low-income family spends a larger portion of its disposable income on necessities than a high-income family

• Depending on income level, people with young children or university and college bound children will have less discretionary money to spend

• Aging parents, and medical issues mean less discretionary income

Price

Price affects the types of purchases and the quantity of purchases

Some believe, the higher the price, the better the quality

People will pay what they believe an item to be worth. If their perceived value is lower than the price, they won’t purchase the product or service.

2. Status

• Some purchases are made to satisfy a desire to feel important

Conspicuous Consumption

• Purchasing goods and services because of a desire to flaunt purchases and/or to impress others.

3. Current Trends

Fashion

Clothing helps create an image

May be an indicator of status, popularity or group identity

Peer pressure can influence these purchasing decisions

Current Trends

Technology• Often comes into play with the

phrase…”keeping up with the Jones’s” or in many cases, your friends.

• Keeping up to date for professional reasons• Keeping up to date to identify with your

children• Individuals who love to play with the latest

gizmo

4. Customs and Habits

Customs• Family, religious, community and customs

affect consumer choices. • Examples include birthdays, Christmas,

baptisms, barmitsfa, weddings, etc.

Habits and Addictions• Going to a movie every month, renting a

movie every weekend, buying a monthly or weekly magazine, smoking

5. Promotions

Businesses spend a great deal of money on promotions and

advertising to instill a desire and/or perceived need for a particular product and/or service.

Businesses often use common insecurities to create a desire for their

products.

The Wise Spender THE WISE SHOPPER

1. Compares what’s available from different stores and online 2. Looks for higher-quality products that will last 3. Makes sure a product has the right features before buying it 4. Asks the vendor about delivery and warranties 5. Does research before buying anything 6. Watches for clearance and promotional sales 7. Considers buying things second-hand 8. Avoids impulse buying

Planning and Comparing

The following resources can help with your planning and comparing:

1. Visiting stores 2. Comparing catalogues and newspaper

advertisements 3. Phoning stores or checking online 4. Customer references 5. Consumer Reports, MoneySense, and

Globe and Mail

Source

• Wilson, Jack et al. The World of Business, 5th Ed., Nelson Education Ltd., Canada, 2007