Summary

  • One thing income is not is wealth. This is the first confusion we might encounter: High income does not necessarily mean great wealth.
  • Savings is the source of income that protects our lifestyle when other income stops, but savings by itself, even significant savings, is not wealth.
  • Income and wealth are taxed differently, so let’s start with the basic understanding that there are two tax systems, not one.

 

No doubt income, wealth, and taxes will be in the forefront of the news and conversation in the coming year as a new administration settles into Washington. Money is always at the top of the list since taxes are the foundation of all government activity, but never more so than at the beginning of a new political season when campaign pledges bang up against reality.

I thought it might be helpful to review the basics of income, savings, wealth, and taxes—all very different things—so we might be better prepared to make sense out of much of the nonsense we’ll be hearing in the weeks and months to come.

Income is the Football

There’s an old story that Knute Rockne started each spring training season by holding aloft a ball and announcing, “Gentlemen, this is a football.” His record is proof you should always start at the beginning, not take anything for granted, and keep things as simple as you can thereafter. Works for personal finance, too.

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