Budgeting Series Overview
This is part 2 of our 10 part budgeting series
43% of Americans experience a monthly income swing of 25% or greater. This is income volatility.
Income swings can come from irregular work hours from all sorts of jobs, such as freelancers working in the gig economy or tip-based jobs in the service sector. As you can see, many in the middle class are experiencing these monthly income changes. These types of changes can wreak havoc on a budget.
Income swings can create a dependence on high-cost borrowing without planned savings to smooth out the dips, so when building out your budget, plan for these types of income swings if you anticipate this happening in your future or is happening now.
To manage money as a couple effectively, both spouses must be fully transparent about what they earn. They must be honest to work together and dive into the key areas to consider when discussing how much they make.
Income volatility
Passive income
Gross pay vs. net pay
Types of income
Earned Income
Earned income is any income received from a job or self-employment. Passive income is usually taxable but often taxed in different ways by the IRS. In many cases, the tax burdens are less on passive income because businesses can deduct more top-line expenses, reducing the taxable income.
Our family has benefited from passive income ourselves. When we first married, we were broke with a child on the way. Our first purchase was a duplex; we lived on one side and rented out the other, which saved us a lot of money fast.
Fast forward 20 years, we own the duplex outright and collect monthly rent, which helps offset expenses and goes toward paying and saving for our kids' college.
Gross pay vs. net pay
Do not overestimate what you earn and underestimate what you will spend. What you earn will be taxed before you can spend it, and what you spend will always be more than the sticker price because of taxes.
Gross pay is what you earn before deductions, and net pay is what you have left over after deductions. Build your budget using your net pay!
These paycheck deductions include taxes such as federal income tax, state income tax, local taxes, and payroll taxes (social security and medicare). Additional deductions include health care and investing for retirement, such as a 401k or Roth 401k.
Unearned Income (passive income)
Passive income is generated from an asset or investment that require little to no active involvement from the recipient. Passive income allows individuals to earn money without working for it, creating a more flexible lifestyle and providing financial stability.
By diversifying income streams, couples can reduce their dependence on a single income source and build long-term wealth. Additionally, passive income can provide a valuable source of income during retirement or during periods of financial hardship.
Three examples of passive income are:
Rental income: Earning rental income from a property is a common form of passive income.
Dividend income: Dividends are payments made by companies to their shareholders, usually quarterly.
Royalties: Earning royalties from creative works such as books, music, or patents is another form of passive income.
Wrapping it Up
Transparency about earnings between couples, planning for potential income changes, and more than one income stream is an empowering strategy for couples who seek financial stability.
Citations
Dew, J., Britt, S. and Huston, S. (2012), Examining the Relationship Between Financial Issues and Divorce. Family Relations, 61: 615-628. https://doi.org/10.1111/j.1741-3729.2012.00715.x
“Face the Numbers: Moving beyond Financial Denial.” American Psychological Association, American Psychological Association, 22 Mar. 2022, https://www.apa.org/topics/stress/money.
Parker, Kim, and Renee Stepler. “Americans See Men as the Financial Providers, Even as Women's Contributions Grow.” Pew Research Center, Pew Research Center, 10 Sept. 2020, https://www.pewresearch.org/fact-tank/2017/09/20/americans-see-men-as-the-financial-providers-even-as-womens-contributions-grow/.
Chavda, Janakee. “In a Growing Share of U.S. Marriages, Husbands and Wives Earn about the Same.” Pew Research Center's Social & Demographic Trends Project, Pew Research Center, 14 Apr. 2023, https://www.pewresearch.org/social-trends/2023/04/13/in-a-growing-share-of-u-s-marriages-husbands-and-wives-earn-about-the-same/.
Syrda, Joanna. “Spousal Relative Income and Male Psychological Distress.” Spousal Relative Income and Male Psychological Distress, SAGE Journmal, 28 Oct. 2019, https://journals.sagepub.com/doi/10.1177/0146167219883611.
“2 In 5 Americans Admit to Financial Infidelity against Their Partner.” NEFE, https://www.nefe.org/news/2021/11/2-in-5-americans-admit-to-financial-infidelity-against-their-partner.aspx.
Smith-Ramani, Joanna. “Income Volatility - Aspen Institute.” Asset Funders Network, Aspen Institute, 2017, https://www.aspeninstitute.org/wp-content/uploads/2017/12/AFN_2017_Income-Volatility_Final.pdf.
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