How money is earned

Key topic

This lesson discusses the earning of money and the link between earning money and budgeting.

Learning objectives

• Understand what is money earning and how it’s done
• Plan ways to earn money
• Discover how to create a personal budget
• Utilize the examples to practice simple budgeting skills

Earning money

Earnings are the amount of money you make from having a job. Most earnings come from work that you’ve done, although money you earn from other sources, such as an investment, or money from interest, can also be called earnings. Any financial profit or gain you make goes into the earnings category, since you earn that money.

Notice that the word “earn” is associated with the fact that you have to make an effort to make that money. You have to do a job, or perform a task. It can be through labor, just like in sports where you have to exert physical effort to do your job, but it can also be through intellectual effort, or just the simple fact that you have a good idea or a great skill (the case of pro athletes) that works and you earn money.

The world, the people and the internet are full of promotions of easy money. But you should know better. There is no such thing as easy money. You have to work for your money, earn your money, and that is why it’s usually called hard-earned money, because you have to work really hard for it.

Once you have worked hard for it, you will realize that you become more sensitive to how you spend it. You want it to go to good use, you want your hard-earned money to improve your life’s quality and make you feel better for having earned the right to spend your money; all of a sudden, better financial choices become important to you, better financial planning becomes a priority, your needs become more important than your wants and you set financial goals and continue to work hard to achieve them. It’s a cycle and it makes perfect sense that the cycle moves the way it does.

You should be aware that there are two different types of earnings.  There is a difference between active earnings and passive earnings.  Remember our previous lesson where we briefly explained active and passive earnings/income?  Active earnings represent income actively earned from working either on a job or a business.  It is called active because you have to act to earn it, you have to put in both time and effort towards earning it.  Passive earnings represent money earned by not working yourself but by having your assets work for you. Such income could be dividends on investments you have made, interest on bonds you have bought, rent income from a property you own, an inheritance, etc.

At your age, your parents are the ones earning the money and it seems very easy for you to just ask for money, have it readily available and not really care about how, where and how much you spend it on. That is why it is important to learn about the cycle and prepare early, as a time will come when you will be on the exact opposite end.

A very important rule of personal finance is to spend less than you earn. So, if you want to get ahead financially, it’s important to save money whenever you can, from the money you have available. At the same time, if you want to improve your finances, in addition to saving money, you should consider ways to earn more money. Learning how to earn more money can improve your financial situation in a great way.

Once you start earning your own money it is important that you allocate this money wisely and with a plan. The allocation and control of your earnings, over a period of time is what we call a budget.  Let’s watch a 5-minute video which features some ‘creative’ ways through which teenagers can earn money!

How To Make Money Fast as a Teenager

Action Steps – Exercise 1 (5 minutes)

• This next summer, do you plan on doing anything to earn some money? If yes, what?
• Would it be an example of active or passive earnings/income?

Active income- Salaries and wages

Two examples of active income/ earnings are salaries and wages. The vast majority of people on this planet earn the greatest share of their income through salaries/ wages. Most of your parents make a living and provide for you and the rest of the family through their salaries.

These two terms – salaries and wages— are used interchangeably, although, there is a small difference. Salary is defined as a fixed regular payment, usually paid on a monthly basis by an employer to an employee. A wage on other hand, is not necessarily fixed. It may for example, be subject to hours worked. To be more specific, a lawyer who is under contract with a law firm probably receives a salary. A waiter/waitress probably earns a wage, and the amount of money they get paid depends on the shifts (hours worked) they worked in a given month.

Usually, there is an employment contract which explains all that as well as the responsibilities of the employer and the employee. If you ever become a professional athlete, a soccer player let’s say, you will be under an employment contract with the club you compete for, which will detail your compensation. Moreover, some soccer players have certain provisions and conditions in their contract which change their compensations. For instance, on top of your salary, there may be a provision in your contract which states that if you score more than 15 goals in a given season then you get a 5% bonus. One of the advantages of earning a fixed salary is that you know every month how much money you will receive in your bank account which will in turn enable you to make plans with accurate predictions. Other types of active income may be one-off payments. Examples include income from endorsements or for participating in a TV advertisement and so on.

Understanding payslips

A payslip is a detailed summary of your earnings and deductions issued by your employer on a weekly or monthly basis. You have a right to a payslip; whether you are working as a clerk for the summer or an investment banker at the most reputable bank, or an athlete for that matter, your employer should give you a payslip.

Your payslip can include a wide range of information which could vary from employer to employer, but there are a few things it must always include. These are:

• Gross pay – this is the full amount you get paid before any taxes or social security has been taken off, including any add-ons such as bonuses and/ or commission.
• Deductions (Variable) – this refers to the deductions that could change each payday, and will show the amount that’s being paid. It includes income tax and social security.
• Fixed deductions – these are the deductions which do not change, for example, a monthly amount deducted for group medical insurance, or union subscriptions, etc.
• The total amount of take-home pay (net pay) – the amount displayed is after all deductions have been taken off. Basically, the money you see in your bank account.

This is the information that your payslip MUST include, although, it is likely that you will see other information on your payslip as well, which will vary from company to company and country to country. Examples include: tax code, payroll number (company’s way of identifying you financially), tax period (month usually), expenses (if you’re owed travel expenses or any other reimbursements) and so on.

Passive income- Investments and other ways of earning money

Although the main source of income for most people comes from working and receiving a salary or wage, there are different ways to make money as well. Instead of working to earn money, you can take the money you have and make them work for you. Most of the times, this happens through investing. Investing is when you take your money and put it somewhere with the aim of making a profit. You can invest in a company, property, product even people in a sense.

For instance, you might have a friend who can cook the most amazing cupcakes. However, they don’t have the money to bake hundreds of cupcakes and sell them as you need all the baking materials and so on which are not that cheap. Now let’s say you have managed to save $100. You can make an agreement with that friend and you can give them those $100 in order to make those cupcakes and sell them. In return, that friend may give you 50% of the money they make. In reality, what you did is invest money in that friend ($100) but you expect that when they sell those delicious cupcakes, the 50% they are supposed to give you back will be more than the $100 you invested, which will mean that you made a profit from your investment.

We will discuss investments and all the relevant terms at a later stage. For now, let’s return to the ways you can earn (passive) income and how it works. We will list a few since we cannot cover everything:

• Real Estate investment– You can purchase an apartment and then rent it out instead of living in it. That means that you get a healthy, steady income each month from rent payments, without actually working for it. This is not limited to apartments, it can be any piece of real estate; a house, a warehouse, even just an empty piece of land.
• Stock investment– I’m sure a lot of you have heard about the stock market. We will talk about it in more detail later, but for now let’s explain how investing in the stock market can make you money. You can do that by buying stocks in a company. When you own stock in a company, you partially own the company and have a right to a portion of the company’s value. For example, if you owned 10,000 shares of a company that has 1,000,000 issued shares, you would own 1% of that company. You can profit by how the market values the asset you own. If the company achieves a big profit, investors will want to own its shares in order to benefit from future profits, driving up demand for them and increasing their price. You can profit by selling your shares at a higher price than the price you bought them or by receiving dividends (profit distributions to owners of the company) on the shares included in your investment portfolio.
• Savings account– The money you deposit in your savings accounts are basically being lent to the bank, which loans it out to other people. When you save your money in the bank, the bank basically pays you for that privilege. When you save your money in a bank, the bank offers you an annual rate of return known as an interest rate. Therefore, they pay you for choosing their bank to save your money. Again, you don’t perform any work, your money works for you.
• Royalties– Not all passive income is related to investing. Royalties are money that writers, musicians, actors and other artists receive when the companies they sold rights to use and reuse their work. Even athletes receive something similar when video game companies make games with their names, image and likeness (physical characteristics). When companies such as YouTube and Spotify make money by putting an artist’s song on their platform, the artist is entitled to a profit as a result. The said artist might have worked once to produce this, but now they benefit financially without actually working.
• Sponsored ads on social media– When people gain enough following on their social media accounts, they might be able to make money off of it. Companies tend to approach such individuals who in turn advertise products for these companies in return for money. No actual work is performed. The tricky part was getting those followers in the first place.

Everything we discussed in this section we will discuss again in more detail as this course progresses. This is certainly not the last you’ve heard about investments. What is important to keep from here is that in order to have income, you don’t have to rely only on your salary. However, we do not want you to have any illusions. In order to be able to invest and make money, you need money in the first place, to buy that apartment, that house, those Tesla stocks. Nobody will come knocking on your door to give you money and there are risks associated with investments. Do not confuse passive income with easily earned income.

Ways to earn money as a teenager

I am certain a lot of you have already worked during your summer breaks, or had a part-time job throughout the year, or even a one-time job. The best part about working as a teenager is… the money! Moreover, by earning that money yourself you get to spend it however you like without having to account for it to your parents. In today’s world with the digital and technological revolutions, the ways for teenagers to earn money are virtually many.  Let’s take a look at some of the traditional and well-established ways, through which teens can earn money:

• Help with the house chores– You can negotiate with your parents for you to take up some of the house chores in return for some cash. Obviously, tidying up your room does not count, or the dirt you left in your path when you got back from practice. You can do things such as cooking for the entire family twice or three times a week, helping in the garden, cleaning the kitchen once a week and so on.
• Babysitting– A lot of teenagers earn money by babysitting and it can teach them responsibility, patience and other life skills on top of getting paid for it.
• Part time job- Apart from babysitting you can get any other part time job. This can be anything from working at your local café, movie theatre to tutoring online, which can be a great, productive and fulfilling way to earn cash. Nonetheless, you will start learning about responsibility early on and develop some workplace confidence which will help you in the long-run in many ways.
• DIY and sell online– A lot of people, especially during the COVID-19 pandemic, learned a new trait. Baking cakes, making candles, crafting jewellery and so on. The best part about it is that you can earn money doing your hobby and selling the things you create online.
• Blogging- Are you a gifted writer with specific interests? Good. There are platforms you can write on and then either charge people to read your stuff or earn money through the number of clicks you get.
• Freelance work– This is one of the easiest ways to make money; through freelance work, which can be anything from copywriting, graphic designing, video editing, etc. This of course requires you to be good at something, or start learning now.

Action Steps – Exercise 2 (10 minutes)

Please reply to the following statements with a True or False (T/F)

1. An example of active income is an accountant who works at accounting firm XY and receives $2,500 as compensation for her work ___
2. An example of passive income is a lawyer who gets a bonus at the end of the year because of exceptional work___
3. It is highly advisable to spend as much money as you make, but not more ___
4. Although the terms salaries and wages are used interchangeably, there are differences ___
5. The main difference between a salary and a wage is that a wage can vary from month to month based on certain conditions such as hours worked ___
6. The compensation an NBA player receives by the team he competes for is an example of passive income ___
7. Saving money in a savings account in the bank is a type of investment ___
8. A lot of passive incomes is the result of investing ___

Answer sheet

After the students complete the above exercise, go over all the answers and discuss them with the class.

Lesson wrap-up

Today we discussed the various ways through which people can make money. We began by explaining what earnings are and distinguished between passive and active earnings/income. We then discussed salaries and wages, which are the two most important ways through which people make a living. Finally, we outlined how passive income is made by giving several examples, such as real estate and stock market investments. The important thing to take away is that there are multiple ways of earning money.

At this point we will wrap up today’s lesson.  First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have.  Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!