Topic: Time To Review and Categorize Your Income.
Why This Topic For You Today? Is it time to review and categorize your income? As we look to the weeks and months ahead, for many people it is unknowable how their income and lifestyle may be impacted by the Covid-19 virus. Until such time as a vaccine is created and widely adopted, our day to day lives may be quite different. When will the case count begin to peak and when will things start to get back to normal? Will there be a “new normal”? Will your income be similar in the future as it was in the past? If your income is in question, is it time to review the amount of income you receive and how this income is taxed?
Road To Mastery Strategy: To solve or address any complex problem, the first step is to break it down into smaller pieces. When it comes to reviewing and categorizing your income, consider the following:
- Before Tax vs. After-Tax: For this exercise, it is important to look at your before tax income amounts. We will then calculate the tax afterwords.
- Guaranteed vs. Variable Income Sources: What amount of income do you receive reliably and consistently each month? What amount of income may fluctuate in the months ahead? It is important to understand where your income comes from.
- Timing of Income: Do you have income that you receive reliably each month or do you typically receive commission or bonus income at certain times throughout the year? It is important to understand the timing of the income you receive so that you can compare it to the timing of your expenses.
- Are you married or common law? If so, how does your income compare with the income of your partner / spouse? To what extent can you split income between you and your spouse?
The first step in this process is to understand the make up of your income today. The next step is to consider various scenarios going forward:
- What if some or all of your income was lost? What if your income was reduced by 20% to 40% or more?
- To what extent would some of the lost income be recovered through Employment Insurance?
- How would this new situation change the amount of tax you pay?
There are three really important points I want you to take away from this simple exercise:
- The key to managing through a period of significant change is to have great clarity on where you are today: what is the composition of your income today?
- Something is only as good as to what you compare it to: by comparing the amount of income you receive in each area (guaranteed vs. variable, timing, income that can be split), you can begin to determine how your take home income will be impacted by any potential future changes.
- It doesn’t matter what you earn, it only matters what you keep: What are the tax implications to you with this new level of income? If you know where you are today, and if your income were to not fully recover in the months or years ahead, how would your tax picture change? If you have less income you will also pay less tax. Thus, the difference to your take home income may not be as much as what you expect.
Summary: The key to reviewing and categorizing your income is to have great clarity on the amount of income you earn, how you earn it and when it is received. This approach helps to determine ways you can better align the timing of your income with the timing of your expenses. This approach can also determine the easiest way to generate more income so as to cover your monthly expenses. At this time of uncertainty, you may wish to track your income amounts in detail each month and project these values forward.
About Us: Nelson Financial Consultants is an independent financial services boutique. Nelson Financial Planning Corp. provides fee only financial planning services. We can assist you by building a custom financial plan that considers multiple scenarios designed to pay less tax, take less risk, reduce fees and expenses while retaining more income and building more wealth.