Understanding Income Sources: Employment, Self-Employment, Investments, & Government Aid, Study notes of Business

Download Understanding Income Sources: Employment, Self-Employment, Investments, & Government Aid and more Study notes Business in PDF only on Docsity! 45 GETTING AND EARNING MONEY Part 2 46 49MODULE 5 At what age would you hope to be “financially independent?” How much money do you think you would have to earn from your savings, investments, etc., in a year, to be financially independent? How might you start to plan to achieve that goal? How About You? Making enough money to enjoy life is a challenge for almost everyone. Let’s take a look at the different sources of income you may be able to acquire. Employment Income: Working for Others Wages and Salaries Most of us will earn income by working for others – a company, a government, a not-for-profit organi- zation, and so on. Through education, training, and experience, people aim to develop a particular talent or skill while, at the same time, developing general “employability skills” (see the chart at the end of the module) and “enterprising skills” (see the module on entrepreneurship). Employability skills are those general skills that can help you get, and keep, a job. Enterprising skills can be developed and applied by anyone – whether they work for others or themselves. Such skills include being able to identify opportunities for improvement, taking the lead and initiative, being creative, being a team leader, etc. Such skills are often attractive to an employer. Equipped with education, training, skills, and the “right attitudes,” the aim for most people is to get as good a job as they can. And people differ in what they see as a “good job.” Some might want to get the highest wage or salary they can (a wage is paid hourly whereas a salary is paid on the basis of one year’s work). Some might want to work with others – helping people. Some may want to work outdoors. Some may want a job that involves travel. If you hope to be a leader in the workplace, it can help to develop your enterprising skills. Enterprising people often get recognized for their ideas, initiative, team-building and team-leading skills, etc. Enterprising skills can help a person achieve leadership goals. Take Act ion. Take Control! How could you use the decision- making steps to make a decision about the kind of job you would like to get? Think About I t 50 MODULE 5 WHAT ARE THE THINGS THAT WILL BE MOST IMPORTANT TO YOU IN YOUR JOB? The following are some possibilities. There may be other things important to you too. • Level of income • Work environment • Work as part of a team • Opportunities to be creative • Benefits (health, dental, pension) • Helping others • Learn and develop a skill/trade or expertise • Work outdoors • Travel • Work in a profession • Apply a talent you have (athlete, musician, etc.) • Work in a particular industry (technology, entertainment, finance...) How About You? When we decide to look for work, we enter into the “labour market.” Here, you will encounter the forces of “supply” and “demand” that, along with other influences, will affect the wage or salary paid for different kinds of work. In any market – for goods, services, labour, stocks, bonds, etc. – there will be both sellers and buyers. In the case of the labour market, a person offering his/her services in return for an income is part of the “supply.” You, for example, would be the “seller” of your labour services as you look for a job. Employers looking to hire people and pay a wage or salary in return for labour represent the “demand.” They are the “buyers” of labour services. In general, the higher the level of demand for a particular occupation or skill, compared with the supply, the higher the wage or salary will be. There- fore, you would ideally want to be looking for work in an area where there is, or will be, a relatively high level of demand compared with supply. This is a challenge young people face when they are planning their education, training, and career. For example, as you are in your last stages of high school, you may do research and find there seems to be a high level of demand for teachers. It looks to you like the chances of getting a teaching job might be quite good. But the challenge is to look beyond the situation today. You have to look ahead to when you will be a teacher – and looking for a job. What are the job prospects like in four or five years? Will there still be a high level of demand for teachers then? 51MODULE 5 What are some of the jobs that you think are “in demand” today? What jobs may increase in demand in the future? For what jobs today might there be a decline in demand in the future? Think About I tIt is important to consider the labour market condi- tions for occupations that interest you – both today and in the future. You can do this by researching some of the “labour market information” (LMI) that is available on the Internet. The federal government, provincial governments, business associations, professional associations, and others will often have LMI available. Governments and employers are anxious to help young people know about labour conditions – and which occupations are going to be needing workers. Today, Canada has a skilled labour shortage – and the shortages will likely increase in the future. Many jobs requiring the skilled trades go unfilled. Many young people could do well if they went into the skilled trades and apprenticeship programs. In addition, the “post war baby boom” is reaching retirement age. There will be a large number of jobs opening up – that is, if the “baby boomers” have done their planning and are able to retire. Therefore, there should be some good job op- portunities available for today’s youth. The key is to do your homework, learn about where job opportuni- ties are (and will be) and factor this information into your career planning. But there is something else that is very important to consider. Research has shown that one of the most important keys to career success is “passion” – doing what you love to do. So if there is something you love to do – something for which you have a passion – don’t be afraid to go with your heart. If you have always wanted to be a teacher – and the LMI you find shows demand may not be strong – or the supply may be high – don’t let that stop you. If you love it, want to do it, and have a passion for it – go for it. The chances are you will be good at it, will find a job, and will be happy in your work. Try and use available “LMI” to help you pick the occupation, profession, or trade that is of most interest to you. There is lots of information that you will be able to find about different occupations and careers – and what the job prospects are likely to be in the future. Use it to help you decide. Take Act ion. Take Control! Is there a particular kind of work for which you have a passion? Do you have an interest or hobby that you could turn into a career? How About You? 54 MODULE 5 Calculate the approximate income you have received in your life so far. Consider the following sources from which you may have received money. • Allowances • Investment Income • Gifts • Employment Income • Business Income • Awards • Inheritances How About You? ments perform. Most Canadians have to take more responsibility for planning for their retirement than they used to. Planning and money management skills are becoming more and more important. You will probably be involved in many, if not all, of the de- cisions about how your savings will be invested. As with any investment, you can make money – or lose money. Planning for retirement is a major responsi- bility and challenge for most Canadians. Now, at a young age, you may not be thinking much about retirement – but try and give it some thought. When you start working, or if you are work- ing, company benefits may help a lot. And the earlier you start to build up savings, the more likely you will be able to enjoy your retirement when you get there. Self-Employment: Working For Yourself In another module, we explore working for yourself and being an entrepreneur. An entrepreneur is someone who, in order to accomplish his/her goals, sets up and operates a venture. In many cases, this means starting a business. There are thousands of Canadians who have set up and run their own businesses. It is an attractive option for those who can make it work. But a great deal of thought and planning must go into setting up a business – and a lot of hard work is required once it is up and run- ning. So it’s not for everyone. If you set up a business, and run it successfully, your reward is “profit.” Your profit is what is left over after you add up all your revenue from sales and sub- tract all of your costs to run the business. If that final total comes out positive, you earn an income – profit. If it comes out negative, you have a loss. That is why there is risk involved in being an entrepreneur. Most of today’s large companies started out small and were started by one or more entrepre- neurs. Over time, though, as a business grows and requires more money for expansion and improve- ment, the original entrepreneur(s) may sell shares of ownership to raise the additional funds needed for growth. Eventually, the original entrepreneur(s) may sell all of his/her/their shares of ownership. In this way, large companies often become owned by a large number of shareholders. Shareholders are people who invest part of their financial resources in shares of the company. As shareholders, they receive a share of profits – called dividends. Each shareholder receives a share of the profits of the company or corporation according to the number of shares owned. If the company is a “publicly traded company,” shareholders can buy and sell their shares on the stock exchange. More on that in a moment. You may someday set up and operate your own business – or you may already have done so. If the company makes a profit, you earn an income. If you have other shareholders, and share your profits with them, they will earn dividends. So “profit” and “divi- dends” are two other forms of income. 55MODULE 5 Go online to a newspaper, or pick up a copy, that provides information on stock prices. Learn how to read the stock table. Select a single stock and calculate how much you would have to pay (without any fees) to purchase 100 shares of that stock today. Follow the price of the stock on a daily or weekly basis for the period of a month. At the end of the month, determine the value of the 100 shares of this stock if you were to sell them. Would you have gained or lost money? The “get smarter about money” web site of the investor education fund has a lot of great information about investing, saving, and banking. Check it out at http://www.getsmarteraboutmoney.ca/en/pages/default.aspx Learn About Learn About Investment Income Capital Gains In addition to a share of the profits that you can earn from investing in a company (paid as dividends), you can also earn income in another way. If a company’s shares are publicly traded, you can buy shares on the “stock exchange.” An owner of shares (“stock”) of a publicly traded company can sell their shares through a stock exchange – such as the Toronto Stock Exchange. There are many stock exchanges around the world – in New York, London, Paris, Tokyo, etc. There are different ways to explore buying shares – such as working with a “broker” or “advisor“ who works with you and provides advice, or making your own decisions and working with a company that serves as an online broker enabling you to buy and sell stock from your account, and so on. If you buy shares of a company on the stock exchange at $10 a share and sell those shares later at $12 a share, the difference is referred to as a “capital gain.” This can occur with any investment (for example, bonds, real estate, mutual funds, art), not just investments in the shares of a business. Capital gains are earned any time you take owner- ship of an asset (something of value) for a period of time and then sell that asset later at a higher price. As you probably know, though, you can buy an asset – stock, bond, etc. – at one price and then find its price falls. In that case, you have a “capital loss” rather than a “capital gain.“ In some cases, the gains – or losses – can be quite large. That is why there are professionals in the different financial areas to provide help and advice. You would need to pay fees for their services. There are professionals who can provide help and advice with buying and selling real estate, stocks, bonds, mutual funds, RRSPs, RESPs, and so on. You will have to decide, when/if the time comes, as to whether you want or need professional advice. If you get help, make sure the person you work with is trained and qualified to help you with the investments you are planning to make. Therefore, buying an asset at one price and selling it at a higher price to make a capital gain is another way of getting income. 56 MODULE 5 Interest Interest is another form of income. Interest is the income you receive when you provide someone with use of your money for a particular period of time – e.g., a loan. That time period may range from a matter of days to years. As an example, you may provide funds to a bank by depositing your savings there. The bank pays you interest while they hold on to your money. Why? Because the bank will lend a good portion of your money out to others who are looking to borrow money from the bank – for a home, a car, a consolidation loan, etc. Those borrowers will then pay interest to the bank. Don’t worry, banks and other financial institutions keep enough money on hand to give you back your money if and when you need it. Depositors’ insurance, pro- vided by the Canadian Deposit Insurance Company (CDIC), also helps protect depositors’ money, up to a certain limit, should a bank ever get into difficulty. The banks earn an income on the “spread” – the difference between the interest they pay to savers and the interest they charge to borrowers. They also earn income in other ways too – such as fees. Tax-free savings accounts (TFSAs): these can be a good way for young people to save money. The money you can make from interest and capital gains in a TFSA is tax-free. Check out TFSAs. They are becoming very popular. Next time you are in a financial institution, look for the posted interest rates. Examine the interest rates. How do the rates offered to savers compare with the rates charged to borrowers? Why do they differ? Are different interest rates available to savers? If so, why do these differences exist? Are there different interest rates for different kinds of loans? Learn About Learn About You may also lend money to a company or gov- ernment by buying “bonds” that they issue (sell). Bonds are like an I.O.U. If a government or compa- ny wants to raise money by borrowing rather than selling shares of ownership, they can sell bonds to borrow money over a certain period of time (e.g., 10 years). They will pay a certain amount of interest (e.g., 4%) to the bond holders. Bonds can change hands after they are issued and before they “ma- ture.” A bond will have a maturity date when the amount borrowed will be paid back to whomever owns the bond on that date. For example, you can buy and sell bonds just like stocks – but in the bond market rather than the stock market. You can also lend a government money by buy- ing Treasury Bills, which is the way the government borrows funds for periods of less than a year (they use bonds to borrow funds for periods of more than one year). Interest, then, is the income you earn by deposit- ing your money in an institution, and lending money to others, for a period of time. 59MODULE 5 Understanding Deductions from Your Pay-cheque For most people, it is a bit of a shock when they receive their first pay-cheque. They look at it and see all kinds of deductions from their “Gross Pay” reducing the amount of their final “Net Pay” – that is, what you actually get to take to the financial insti- tution for deposit. What is the money that is being subtracted? • Income Tax: Your employer will be obligated to withhold, and submit to the government, the amount of federal and provincial income tax that you are likely to owe at the end of the year. • CPP or Canada Pension Plan: If you work, and contribute over the course of your working life to the Canada Pension Plan, you will be able to draw an annual pension from the government when you retire. You can start to collect the CPP pension when you’re 60 at the earliest or defer taking the pension until you’re 70 at the latest. The amount of your CPP retirement pension you receive will depend on how much and how long you have contributed to the plan over the years. Be aware that the pension received is not an amount that is likely to support a majority of the retired Canadians at the life- style they have become accustomed to. The maximum amount that a person could receive from the Canada Pension Plan in 2018 was about $13,600 if CPP was taken as of age 65. • EI or Employment Insurance: This is an amount deducted from a pay-cheque that is available to provide support for Cana- dians who become unemployed through no fault of their own. It is something that you might benefit from some day – but most Canadians would hope they do not need it. But it is a program that exists to provide help to those who become unemployed, and those who are working contribute to the program as a sort of insurance in the event they lose their job. • Group Insurance Programs: Many companies will have group insurance plans to cover things like health, life, and dental payments. If you are eligible for these benefits, you will likely pay towards the cost of providing them. This is often a shared cost between the employer and the employee. Such benefits can be important and should not be overlooked when considering em- ployment opportunities and negotiating employment agreements and contracts. When you are young, thinking about retirement is not a common thing to do. But, if you can, take five minutes to just think about the kind of life you would like to live when you eventually retire – and the level of income you may need to live that life. How are you going to get that level of income? Think About I t 60 MODULE 5 • Company Savings Plans: The common rule in managing money is to pay yourself first, if you can. That is, put some savings aside and then spend the rest rather than spending and then hoping you have some money left for saving. Saving before spending can be challenging for some. One way to save is to set up an automatic savings plan. That is, an amount will be deducted each month and deposited into a savings instrument as soon as you receive your pay. It is a way of having “forced savings” – that is, you set it up with your employer at the outset and each month the savings portion is looked after automatically before you can spend it. Sometimes the company matches a portion of the savings you put away. Such arrangements may be able to help you save for retirement. • RRSP – Registered Retirement Savings Plan: One way of building up savings for your retirement is to open an RRSP and start depositing funds to the RRSP at a young age. This enables the savings in the plan to grow over time so that you can hopefully reach the level of savings that you need or want for retirement. Some companies will provide you with an opportunity to have funds deposited automatically to an RRSP. Some companies will actually contribute to the RRSP as well on behalf of its employees. So there you go. These are some of the deductions that you may see on your pay-cheque. It is important that you understand what makes up the difference between your gross and net pay each month. Note that some of these deductions can provide you with benefits and some allow you to save over time for your use in the future. Understanding the benefits that are available and how the savings programs work may allow you to maximize the personal value that you can get from partici- pating in the various programs offered by your employer. Don’t overlook or ignore insurance. You likely will work hard to obtain things you want in life – car, home, boat, etc. You also want to protect your health and well-being – as well as those who may depend on you. Don’t be caught unprepared or unprotected. Avoid buying too much insurance but aim to have enough so that you have peace of mind. $ Tip 61MODULE 5 Module Summary Say What? Possible New Terms! 1. Financial independence: having access to enough income to enjoy life without having to work if you do not wish to do so. You are not reliant on others for the money you need to live. 2. Compound interest: when savings earn interest, and the interest is added to the savings, this enables the savings to grow and earn more interest. Over the years more and more interest is added and this helps to build up the value of savings. 3. Wage: the hourly rate paid to a worker. 4. Salary: the annual amount paid to a worker. 5. Stocks or shares: represent part ownership in a company. “Shareholders” will receive a share of company profits based on the number of shares they own – if the company makes a profit and prof- its are distributed. 6. Bond: a way in which governments and companies can borrow money. A bond can be sold for a period of time and bondholders will be paid a set amount of interest. On the maturity date, the money will be repaid to the bondholder. 7. Minimum wage: the lowest wage that an employer can legally pay an employee. 8. Disability insurance: protection you can buy to provide an income in the event of a long-term illness or disability. 9. Registered Retirement Savings Plan (RRSP): a means of saving for retirement. Money deposited each year is tax deductible up to a certain maximum. Money is taxed when it is taken out of an RRSP. 10. Registered Education Savings Plan (RESP): a means to save for children’s education. Money deposited to the plan is not tax-deductible. 11. Defined benefit pension plan: a pension plan where the provider (company, government, etc.) commits to providing a certain amount of income each year when the employee retires. 12. Defined contribution pension plan: a pension plan where the provider commits to contributing a certain amount each year to the plan. There is no commitment to an annual payment in retirement. Thinkabout... or Discuss: • How can you determine if you are a prospective entrepreneur? • How feasible is it to achieve “financial indepen- dence” today? What are the keys to being able to achieve financial independence? • What are some of the jobs/occupations where demand is likely to increase over the next decade? Decrease? • How can young people get the best guidance and advice in making education, training, and career decisions? • Why aren’t more young people going into skilled trades where there are jobs and good incomes? • Is it true that more and more young people aim to live the lives they lived with their parents/guardians as soon as they leave home? Why? What are the consequences of this? • What factors are leading young people to take on more debt at younger ages these days? 13. Capital gain: is earned when an asset is bought at one price and sold at a higher price. 14. Dividends: the shares of a company’s profits that are given to shareholders. 15. Stock exchange: where buyers and sellers come together (not physically) to buy and sell stocks with the help of stockbrokers. 16. Broker (or stock broker): a person trained and licensed to buy and sell stocks. 17. Estate: the money and assets left by a person upon death. 18. Benefactor: a person who receives money or assets, as indicated by a will, from someone who has died. 19. Executor: the person or persons responsible for seeing that an estate is settled according to a will.