From the book Rich Habits, by Tony Melvin
Two Types of Income
A trick of sorts has been played on those who earn money—both individuals and corporations, big and small. The trick and the basic confusion of money troubles is this: not all the money you receive belongs to you.
There are two types of income. The money you receive falls into two categories: the money you can use and the money you can’t use. The money you can’t use is income that does not belong to you.
If you take a look at any payslip you will see something like this: Weekly income $1,000, Tax withheld $200, Net income $800 (this is what the person actually receives).
The tax portion is unusable income. You don’t receive it, but you did earn it. Many assume that all the amount received, the $800, is usable income, but this is not always the case. For example, if you have to pay child support, education debts or past taxes, these obligations are often enforced by strict laws—they must be removed before any other allocations occur.
The two types of income are most prevalent in business, where money received includes sales tax, profit tax, cost of goods, staff wages, sales commissions—the income to cover these obligations is unusable income. If spent it leads the business into trouble because that income does not belong to the business.
Just like the English language fails to define the two different types of debt (investment debt and killer debt), so too are we left with only one word—“income,” to describe the types of money received, when in fact there are two types of income.
There are plenty of words used by accountants and governments to describe income, but we certainly don’t want to use any of those terms because they are apt to change, to make profits more, or less, depending on who is receiving the report.
We need new and simple terms that will help you allocate correctly and apply the Rich Habits.
The types of “income” are:
1. Money Received - the total amount of money received for a given period, such as a week or month.
2. Unusable Income - Money Received that does not belong to you and must be set aside before any other allocations occur.
3. True Income - the remainder leftover from Money Received, after Unusable Income has been removed.
With the above definitions the formula for True Income is easy to follow: