Chapter 1. Earning money is the start of financial independence

Many people think that making a lot of money (or getting a high paying job) is the key to achieving financial independence. While this is not wrong, it is NOT entirely correct. Income does not automatically transfer into wealth. Regardless of the amount of money you earn, you need to understand its details to manage your finances well.  

You never want to be in a situation where you are destitute due to lack of income. Earning money is the beginning of gaining financial independence.

How to

Earning refers to what you bring home from attaining income. Most people receive their income in the form of a paycheck from their place of employment. You can generally expect to see between 28% and 30% taken right off the top of paycheck towards taxes and other deductions (health care premiums, employer matching retirement plans, paying for parking at your office, etc.).

The paycheck amount prior to deductions is your gross income and the amount after taxes and other deductions is your net income. It is very important for you to understand what federal, state, and local taxes you are subject to.

Differentiating gross and net income is crucial because it helps you to draw a clear picture of your actual earning, associated benefits, and financial responsibilities you are subject to. This is the first step to create financial plans in the long term, which contributes to your financial independence. 

It doesn’t matter how much money you make. It matters what you do with your money.

Practice

Now that you know the difference between gross and net income, think of paying it forward and discuss with your friends and family members how to read your paycheck. When examining the details of your paycheck, make sure to check your workplace benefits and taxes that are withheld. Review to see if the deductions are properly drawn. 

Congratulations! You can move on to Chapter 2. Saving and investing explained. 

To review the full module on 10 Principles of Personal Financial Literacy, click here.