Do you include investment returns as part of your "income"

techcrium wrote: ↑

Jan 21st, 2014 10:52 am

Note: 200K signing bonus is tax free of course.

Signing bonuses aren't tax-free.

Mark77 wrote: ↑

Jan 21st, 2014 10:55 am

Signing bonuses aren't tax-free.

Well then not to argue technicalities and semantics as you always enjoy doing....

The signing bonus is $302K (or whatever that amounts to $200K after tax).

techcrium wrote: ↑

Jan 21st, 2014 10:52 am

Yes pretty much, except that the premise is that you cannot just "find" another job that paid more than $50K.

Note: 200K signing bonus is tax free of course.

Let's say you are worth $10 an hour and somehow magically landed this crazy job offer. If you were to leave both offers on the table, you would go back to your McDonald's wage job.

Well, now there's too many fantasy restrictions in place. You can always find another job. You can always improve your own human capital and therefore increase your compensation. You can get fired. For all those reasons, Job 2 would likely be better.

If we go with your premise that you cannot just find another job that paid more, then we have to also assume you cannot get fired from your job. In that case, the $71K would win, as after 10 or so years (depending on the return on the $200k), the $71k would amount to greater total assets.

Agreed with some points made.

A salary is take home. You put time in, you get money out. Investment is a different game where you risk money to make money.

A stock trader once said the money you have in the market, no matter what the gains are at any given moment, is not really yours until you are totally out of the game and retired. Every day you are 'in the game' and risking that money to make money, you are exposed to market risk for investments mark to market. So the idea is never celebrate big wins in the market because the market can take it away the next day, if not in that particular investment, then in something else. And even if companies can keep having dividends increase year over year or whatever people preach as a good stock selection criteria, but if you principle value of the investment decreases, you are still in red. You can be up one day and down the next.

So quite different to a salaried position where you just keep getting inflow of cash. Although, I suppose good companies with staying power and a decent dividend, can continue to provide that dividend in the long term and generate that extra income. That said, if the world is falling apart, you'd lose your job as well as lose in stocks so salaries are not at all fool proof either.

Overall, I would consider investment gains as part of your overall comprehensive income, if that investment gain is coming in as dividends and not capital gains.

bruizeman wrote: ↑

Jan 21st, 2014 10:49 am

I agree that most are risk averse, but don't quite agree with your conclusion that most would choose the $71k option. Having $200k in the bank is a safer option than having a higher salary.

The way the OP phrased his question, assuming you are starting off at 18 years of age, with $0 in the bank, you have basically 2 job options:

Job 1: $71k annual salary
Job 2: $200K signing bonus + $50k salary

Which would you choose?

The $200K can't just go "in the bank" though. It must be used to try to generate income at a minimum 8% average annual return. And considering all the (bad) choices I made at age 18-20 when first trying to play in the stock market... at that age I would easily have lost half the $200K lol. So that's why I said to take the higher salary.

Of course if this question was for me today, and I had the investment experience i do now... I would take the slightly lower salary and $200K in a heartbeat.

rob444 wrote: ↑

Jan 21st, 2014 11:12 am

The $200K can't just go "in the bank" though. It must be used to try to generate income at a minimum 8% average annual return. And considering all the (bad) choices I made at age 18-20 when first trying to play in the stock market... at that age I would easily have lost half the $200K lol. So that's why I said to take the higher salary.

Of course if this question was for me today, and I had the investment experience i do now... I would take the slightly lower salary and $200K in a heartbeat.

What happens to the $200k afterwards is irrelevant. You can leave it in a savings account, you can invest it in stocks, you can buy a house, you can buy toys, you can do anything you want with it. Even if you immediately "lost" half of it, you'd still have $100k vs $0 had you chose the $71k job.

Would you really take Job 1 over Job 2?

bruizeman wrote: ↑

Jan 21st, 2014 11:17 am

What happens to the $200k afterwards is irrelevant. You can leave it in a savings account, you can invest it in stocks, you can buy a house, you can buy toys, you can do anything you want with it.

Not according to OPs hypothetical situation. The $200K must be used to generate income at around 8% per year as the idea is to have the same "lifestyle" or yearly net income as the higher salaried person.

Realistically of course I would take the lump sum, do with it what i want, and immediately try to get a better paying job! That's the problem with hypotheticals, they rarely ever reflect reality.

This is a strange question, even though its theoretical.

Investment gains are not actual gains until you sell and the cash is in your account (brokerage or bank). It doesn't matter how one person describes or perceives their income vs. the next person. Salary is salary, capital gains are capital gains and dividends are dividends. It all adds up to income but "paper" gains are meaningless, be it in the stock market or in real estate - until you realize those gains.

I would take the lesser salary and 200k investment account, hands down. But that's just me.

I wouldn't consider it income because it's not guaranteed, heck it could be a challenge to sell the stocks and you may have to cut the price (happens time to time...).
If it were dividends, could make sense though...

Whether it is guaranteed or not is irrelevant. Your salary is not guaranteed either if you get fired or laid off. The point is not to project and expect a certain gain in the future. But after you have received the dividend gains, then they become part of your income for that year. People are allowed to have more than one source of income. Income does not need to all come from a day job. Some people have two jobs. Some people have a side business. Some people have investment gains by trading or by dividends. They are all sources of income.

I believe the dilemma being explored in this thread is really an attempted simplification of terminology. "Income" and "wealth" are appropriately two distinct terms, with two distinct meanings.

Historically, landed gentry could refer to their 'income' from their estates and investments of their wealth, though that legitimately referred to income coming in, not just unrealized market gains. In my opinion in this scenario, the $50k is income, and the $200k is accumulated wealth.

Mike15 wrote: ↑

Jan 21st, 2014 12:58 pm

I believe the dilemma being explored in this thread is really an attempted simplification of terminology. "Income" and "wealth" are appropriately two distinct terms, with two distinct meanings.

Historically, landed gentry could refer to their 'income' from their estates and investments of their wealth, though that legitimately referred to income coming in, not just unrealized market gains. In my opinion in this scenario, the $50k is income, and the $200k is accumulated wealth.

The only time you would include investments as part of your income is if it's in the form of interest income, capital gains or dividends. The original principal does not form part of your income.

snake777 wrote: ↑

Jan 21st, 2014 1:35 pm

The only time you would include investments as part of your income is if it's in the form of interest income, capital gains or dividends. The original principal does not form part of your income.

neither should capital gains

OP, i'd look at it like how a business owner looks at it. dividends and interest count towards income. capital gains do not

if you make 50k in your job, but have a side business that brings in 20k then your income is 70k, regardless of how much that business has increased or decreased in value.

similarly,
if you make 50k in your job, and you have investments that bring in 20k in dividends/interest, then your income is 70k, regardless of how much your investments are worth.

in the long run if you've invested in a quality business or quality stocks, your investment income will grow over time steadily. capital gains are up and down and only materialize if you sell something. thats not income, its a one time benefit

I include all income, to the extent that it is included on line 150 of form T1, as part of my "income". This includes interest, dividends (received and DRIP), and the taxable portion of capital gains. Increases in portfolio value, without being realized, are not included in "income" but certainly are included in net worth calculations.

Not sure why it needs to be more convoluted or complicated than that.