Income and its Uses

ELATE: JOB ENTREPRENEUR’S SKILLS INITIATIVE: A Teacher’s Guide

Unit : 3

Subject : Entrepreneurship Education

Class : S.3

Topic : Income and Its User

Sub-topics : 1. Income

2. Consumption
3. Saving
4. Investment

Time required : Minimum 320 minutes, Maximum 480 minutes

Brief Description of the Topic

Entrepreneurs start business with an aim of earning an income and acquiring wealth. However, as an intention to achieve that, entrepreneurs strive with all abilities to ensure that their businesses succeedd. When these businesses succeed they earn income in form of profits to the entrepreneur.

General Objectives

By the end of this Topic, learners should be able to describe the various types of incomes, the sources of income, the ways of using this income, the functions of consumption, the ways of increasing savings and investments, the importance of savings and investments.

1. Meaning of Income

Income refers to the proceeds that one gets after participating in a gainful activity. Income got may be either of the following;

Salary and wages got by a worker after working a given piece of work earned on monthly basis such as wages.

Profits, these are got when an individual undertakes an investment and the income got exceeds the business expenses.

Interest, this is income got by an individual as a sacrifice of foregoing the use of his income to the benefits of the other bonus.

Fees and commissions received, rent received, etc.

2. Sources of Income

A source of income refers to the base on which an individual or institution earn its income from an activity or service and include the following;

Farming activities e.g. growing of crops, rearing of animals or poultry and selling their products, etc. When products from these activities are sold, farmers get income.

Trading refers to the process of buying and selling with an aim of making profits. When traders sell their products and sales revenue exceeds the cost value plus other administrative expenses incurred in the business, then traders realize profits, and profits constitute income for entrepreneurs.

Manufacturing other entrepreneurs earn income from manufacturing and selling goods. This may be weaving baskets, mats, producing household consumables like bread, etc. When these products are sold at a price higher than their cost of production, the entrepreneurs earn profits which are an income to them.

Rendering services; people get income through providing services which other people need and are willing to pay e.g. teaching, driving, hair dressing, medication, etc.

Paid employment: people in paid employment earn income commonly known as wages or salaries depending on the nature of job being done.

Job-mark skills to be developed by a student while handling various areas of expectations are seen below:

1. Commitment and sacrifice i.e. while saving for the future.
2. Self awareness and self confidence.
3. Decision making.
4. Information seeking.
5. Creative thinking and being visionary.

Activity 1

Learners are requested to make up groups of 10 students to do sanitary work at school after classes e.g. slashing the compound. This will enable them to earn a wage after the work.

Activity 2

Request students to form groups of three to clean the staff vehicles at lunch time and after classes. As a result of the labour offered, these students will be paid a wage hence income for their school needs.

The above activities help the learners know how rendering services and paid employment result into earning income.

3. Ways of using income

Income can be used in the following ways;

• Consumption

Income earned from different sources is normally used for consumption by one who earned it. Consumption ranges from buying household commodities, paying children’s fees, clothing, food and drinks, building family residential homes.

• Savings

Some income earners also save their income. Saving is reserving one’s earnings for future use. Saved income can in future be used for consumption or investment.

• Meeting precautionary needs

Income earners at times put aside some of their income to meet some anticipated future needs like old age, sickness, building a house, etc.

• Investment

Some people use their earned income for investment purposes. They may invest by starting their own businesses, buying productive resources e.g. land, houses, etc buying shares in other businesses, depositing money in banks like old age.

Ways of increasing savings and investments

For investment to take place, people and businesses must have saved a bigger part of their income. Therefore if we are to make bigger investments, then we have got to make bigger savings. Savings and investments can be increased in the following ways:

1. Reduction of consumption

If one consumes more of his income, then s/he will have less left to save. Likewise if one saves more of his/her income, then s/he will have less income to consume (presently but more in future).

2. Provision of banking facilities

If secure banking facilities are provided to people, they will feel confident and keep some of their income in there. For example, Microfinance Institutions encourage people to make deposits which accumulate and enable them to expand credit to the savers to meet their investment plans.

3. Improvement of investment factors

Savings and investments can be encouraged and increased of the lives of savers and values are secure. This will give them confidence about the future and encourage them to save more.

4. Creation of investment opportunities

There are services and businesses which when provided or established in an area will create further investment opportunities for other different services like metal fabrication, food processing, refrigeration services, etc.

5. Develop attitudes of saving

If investment is to be increased then a savings culture needs to be developed among the people. This could be done through intensive sensitisation through the media, workshops and other avenues.

1. Importance of savings and investment

• As a precaution for future needs - people save income to provide for unforeseen problems that may arise in the future and will require them to suddenly spend money.
• For transactions – income is also saved in order to have cash to meet transactions of personal and business nature. At personal level, individuals will need cash to be re-invested in the business or expansion purposes or replacing existing machines.
• Exploitation of idle resources – investing in businesses enables entrepreneurs to use resources that may be idle and convert into goods and services to meet people’s needs.
• Self employment – when an entrepreneur or individual invests his/her income or savings he will create employment for him/herself. This will enable him/her to become self reliant.
• Utilisation of resources – by establishing enterprises whether small or large, it will help in trapping latent resources like human resources, land, water, plants and animals and producing goods and services for export and local consumption or investment. This will lead to economic growth of the area and the country at large.

1. Forms of savings

1. By opening bank accounts and depositing our money there.
2. Buying properties like animals, houses, etc.
3. Investing in businesses.
4. Buying land.
5. Buying shares from other businesses.

Activity 3

Encourage learners to keep 50% of their pocket money (especially those attending boarding schools) by the school bursar; this will enable them learn how to save for the future. Afterwards, let them use the saved money to start up a small stationery shop to provide stationery to their fellow students. This will help them learn saving and investing of the money saved and hence entrepreneurial skills and income.

6. Consumption, savings and investment of oriented people

1) Characteristics of people who prefer to consume most of the income

a) They are very extravagant. They spend any income that comes their way in things they need or may not need immediately.

b) They live a luxurious life by purchasing luxury and expensive goods and services that they come across, some of which may not even be necessary but they just want to show off.

c) They have low desire to save. Such people rarely save and invest their income.

d) They have got no investment plans for the future. This is because their income is always spent as soon as they get it.

e) Their incomes normally tend to be used for paying debts that were incurred prior to being earned.

f) Whenever they have any money that they have earned, they become unstable all the time waiting to go out and spend it. They become stable when the money has been exhausted

2) Characteristics of people who prefer to save

a) They are very careful in their spending. Every expenditure has to be justified in terms of necessity.

b) They normally tend to live a simple life. They do not engage in spending their income on luxury goods and services.

c) They have high motivation to save and invest. They tend to give priority to saving most of earned income.

d) They tend to look at and take up every opportunity that is available for them to save.

e) They tend to prefer foregoing a lot of things at the beginning (at times even necessities of life) performing to save for increased future consumption.

3) Characteristics of people who prefer to invest

a) They are always on the lookout for investment opportunities that may be available in their communities or elsewhere for them to invest.

b) They tend to give priority to investment and much of their income is reserved and used for investment.

c) They normally tend to live a simple life as they spend most of their income on capital goods and services that will lead to further investment.

d) Such people work longer at hard hours to earn more income so that they can increase their savings and subsequently investment.

Making plans for saving

This requires one to forecast how, when and how much income s/he will receive during a given period. This will require the person to be through in making how to counteract them. The next step is to develop a budget and in so doing, prioritise his/her needs. This will entail in doing the following:

1. Identification of needs.
2. Setting saving targets.
3. Prioritising the needs.
4. Find out how the cost of each need.
5. Finding out the total cost of the needs to income and establishing whether the balance meets the saving costs.
6. Carrying out a review of prioritising needs their costs and savings targets to ensure that they can also be accommodated within income packages.
7. Choosing how the savings of income can be done.
8. Making the saving.
9. Spending part of the income on the priority list items that have been provided with the budget.

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