Chapter 1: Households

Where do households get their income?
Where does the income of households go to?

1. Income flows in

In the same street from Ana and Ivan lives another family.  The man, Paul, is a taxi driver.  He is his own boss.  His wife, Barbara, is a halftime teacher.  They have three children and they still go to school.  The family receives 12 EURO child allowance per month.  They receive rent on a savings account.  They also rent 10 student rooms for 50 EURO per month.  And last month, the wife won 1000 EURO with the lottery.

Under which forms does the family earn her income:

1.1 By working you earn money

1.1a First work ...

We already know Ana, Ivan, Paul and Barbara. 

Who is working as an independent, a worker or an employee?

What is the difference between a worker and an employee?

What is the difference between an employee and an independent?

1.1b ... and then earn

Which type of income does a person earn from working?

Workers

Ivan works 174 hours per month.  His income is 0.60 EURO per hour.  His income for the month January was:

Period JAN-01 until JAN-31
Hours 174
Income / hour 0.60 EURO
Gross income 104.40 EURO
Social security 10.44 EURO
Taxable income 93.96 EURO
Withholding tax 1.04 EURO
Net income 92.92 EURO

Employees

Period JAN-01 until JAN-31
Gross income 160 EURO
Social security 16 EURO
Taxable income 144 EURO
Withholding tax 2 EURO
Net income 142 EURO

Independents

Not only employees, but also independents have to earn money to run their households.  For example farmer Bob.  He has his own agricultural company of 40 ha.  He owns buildings, animals, tractors and other equipment.  Bob works hard but he loves his job.  Nobody is paying Bob for his work.  How does he receive his money?

A lot of independents have an income by buying and selling.  The name of this income is profit.

Another group of independents such as doctors, lawyers, ... also have an income.  This income is called an honorary fee.

Exercises

Say for each person if he/she is a worker, employee or independent and which income they earn.

  type of work type of income
Peggy is a nurse and she exercises her job in a clinic. employee income
Steven didn't end his studies.  He is a truck driver for a company. worker income
Monica is a hairdresser and has her own business. independent profit

Mrs. Rosa Loika works as a secretary.  Her monthly salary is 140 EURO.  Social Security is 12.60 EURO and the taxes are 2.70 EURO.  How much does Rosa earn a year?  How much does Rosa pay for social security and taxes per year?

  monthly yearly
salary 140.00 EURO 1680.00 EURO
Social Security 12.60 EURO 151.20 EURO
Taxes 2.70 EURO 32.40 EURO
Net income   1496.40 EURO

1.2 By saving you earn more

The family of the taxi driver could save in the past.  How come?  How did they save?

They have a savings account and they also invest in buildings, because they rent 10 student rooms.

1.3 Sometimes you receive money without doing anything

In the street of Ana and john also lives the family Malchance.  The father was working in a textile company, but the company went bankrupt.  The mother, sales woman in a supermarket, is ill since two weeks.  The family has three children who have to go to school.  How can this family survive?

They live by payments from the Social Security Service.

1.4 Sometimes you receive money by accident

2. Income flows out

We asked families X and Y what they did with their income.  They answered the following:

Use of the income Family X Family Y
Consumption    
    Food 10 EURO 12 EURO
    Clothes 15 EURO 13 EURO
    Home, heating, ... 100 EURO 115 EURO
    Hobbies 8 EURO 12 EURO
    Other expenditures 5 EURO 3 EURO
Taxes, social contributions 8 EURO 10 EURO
Savings 4 EURO 5 EURO
Total 150 EURO 170 EURO

How can a family spend their income?  They can use is for:

2.1 There is a lot to buy and pay

First buy

Ivan and Ana find a publicity f furniture in their letterbox.  They find the models and the prices very attractive.  they visit the shop and ask a salesman.  They indicate to him what they want.  The seller informs them that the goods can de delivered immediately for the price of 150 EURO.

Ivan has some reflections...

To avoid discussions, Ivan and Ana want a document.  The salesman also wants a document, but he wants more...  

The salesman makes an order form and asks for a down payment of 10%.  

An order form is a document by which the buyer and seller make some agreements.  These agreements become binding though the signature of both parties.

One week later they deliver the furniture and the driver gives the invoice to Ivan and Ana.  The invoice is the document, composed by the seller, by which he asks the buyer to pay the delivered goods and services.

Two weeks later Ivan and Ana pay the invoice in cash.

The different steps in the buying and selling process

Then pay

Payment methods

Pay directly to the creditor

Ivan and Ana paid directly to the creditor.  By post they received a letter from the seller saying that they didn't pay the bill.  Ivan doesn't understand.  Surprised he phones to the company.  The employee answers that as far as the bookkeeping department knows, they didn't pay the invoice.  Big problem.

The problem could be avoided by 

Pay through a bank

Scheme of payment: Ivan and Ana > Bank X > Bank Y > Seller

Exercises

Buy and pay tomorrow

Ana is dreaming of a new car.  But Ivan and Ana don't have the money to buy.  They can get a loan in their bank.

Warnings:

2.2 There's more to pay

Income tax

On Friday 13th Ivan finds in the mail a fiscal document.  Everybody has to pay taxes on his income.

Employee

An employee pays those taxes partly during the year: withholding tax.  At the end of the year, the government examines if you have paid enough or too little.

Independents

An independent doesn't pay withholding tax.  To avoid that he has pay everything at once, he can pay advances during the year.

Other taxes

Exercises

1) What type of tax does a family pay on:

2) Carl has on his income of 1560 EURO a global tax debt of 65 EURO.  During the year he already paid 36 EURO.  Does Carl have to pay more taxes or will he get money back?

2.3 Saving

At the end of the year, Ivan and Ana have a surplus of 250 EURO.  They can think about saving.  But Ana is pregnant and a baby isn't cheap.  They have to arrange the room, buy clothes, pay the doctor, ...

They will keep half for using and the other half they will save.  They don't know what to do with their savings, so they go to the bank manager to receive some information.

2.4 Invest

If you want to save you are not obliged to go to the bank.  You can also invest your money in:

Exercises

1) Bart has a bank account.  On the account is 500 EURO.  This account gives him 3% interest.  After 1 year the bank gives him 15 EURO interest. 

Interest = Capital * interest rate * terms

Interest = ( Capital * ( 1 + interest rate ) ) ^ terms

2) What do the following notions mean: