It is important to monitor your annual contributions to your retirement accounts. Annual contributions refer to the funds an individual or organization puts into a savings account, investment, or retirement plan each year. Such contributions are usually made regularly, either monthly or quarterly, but they can also be made as a lump sum deposit. The primary purpose of yearly contributions is to increase savings over time, provide for future financial needs, and take advantage of compounding interest or investment returns. Different types of accounts, such as savings accounts, individual retirement accounts (IRAs), and employer-sponsored retirement plans like 401(k)s, may receive yearly contributions. The amount of yearly contributions may differ based on an individual’s financial objectives, earnings, and spending patterns.
How is Real Income Used
Defining your “real income” requires careful consideration. In my view, “real income” encompasses any money that you receive in your accounts, whether it is from a paycheck or profits from your business that are deposited into your personal checking account. It also includes any contributions or deposits made to your investment portfolio, but excludes any dividends received from your portfolio.
Let’s say you work at a company and earn a take home salary of $50,000 per year. Additionally, you own a small business that generates a profit of $10,000 per year. You also have an investment portfolio that you contribute $5,000 to each year.
In this example, your “real income” would be:
$50,000 (take home salary) + $10,000 (business profit) + $5,000 (investment contributions) = $65,000
So, in this case, your “real income” is $65,000 per year.
A More Complex Example
Let’s say you have multiple sources of income, including:
- A take home salary of $80,000 per year from your full-time job
- A rental property that generates $20,000 in annual rental income
- A side business that brings in $15,000 in profits per year
- An investment portfolio that generates $10,000 in dividends each year
- A trust fund that pays you $5,000 annually
However, you also have some expenses and deductions that need to be taken into account:
- You pay $10,000 in mortgage interest on the rental property each year
- You have $8,000 in deductible expenses related to your side business
In this scenario, your “real income” would be calculated as follows:
Total income: $80,000 (salary) + $20,000 (rental income) + $15,000 (business profits) + $10,000 (investment dividends) + $5,000 (trust fund payments) = $130,000
Total deductions: $10,000 (mortgage interest) + $8,000 (business expenses) = $18,000
Adjusted gross income: $130,000 – $18,000 = $112,000
In this example, your “real income” after taking into account all of your income sources and deductions would be $112,000 per year.
Here are some pointers on Real Income:
- When calculating your Real Income, exclude your tax payments but include your tax refund.
- Check your paycheck every month and make a note of the amount that was deposited into your account. This is known as your “net” income, which is the amount you receive after taxes and other deductions have been taken out.
- Your “gross” income, on the other hand, is your top-line income before any deductions or taxes have been subtracted.
Why is Real Income important?
One crucial aspect of real income is that it is used to determine your savings or investment rate. Additionally, people use this information to understand their spending habits. For instance, if your real income is $100,000 annually, but you spend all of it without saving anything, it can be challenging to make informed financial choices.