Earnings Power in Personal Finance

The United States of America is full of people who have huge student loan debt, credit card debt, and mortgage debt. There are many reasons which can be attributed to this massive increase in personal debt. However, the inability to completely understand and apply the concept of earnings power is also an important reason which has caused this debt. In this article, we will understand what the concept of earnings power is and how it can help people make better decisions related to personal finance.

What is Earnings Power?

Simply put, earnings power is the ability of a person to sell a product or service and then generate earnings from the sale. However, it must be noted that different people have different earnings power. The example of a grocery store can be considered to better understand this concept. There are several people who work in a grocery store. For example, there are people who work as cashiers and stockists. On the other hand, there are certain employees who manage certain departments and even the entire store. Lastly, there is the CEO of the grocery store.

It is important to note that all three types of people work for the same company. Yet, they get very different monetary benefits in lieu of their efforts. This is because they have different earning powers. The balance of this article will explain the concept of earning power in more detail.

Components of Earnings Power

The earning power of a job is determined by several factors. Some of the important ones have been listed below:

• Skill: The biggest determinant of earnings power is the skill that a person has to offer. The job of a cashier or a stockist is required in every company. However, since the job requires very few special skills, it can be done by a lot of people. Hence, if there are more people that can do a job, the supply increases, this brings the price down. The concept of earning power is important from the personal finance point of view since it allows people to look at various skills from the point of view of earnings power before they make a career choice.

• Experience: People with the same skills are also paid different salaries. For instance, a person who has two years’ experience is generally paid less as compared to one with ten years’ experience. In some industries, such as media and information technology, the wages increase rapidly with experience. An individual must be aware of how their earning power is likely to change with experience.

• Time: The time that a person spends on the job is also directly proportional to their earning power. There are some jobs that require people to work longer hours. This is the reason that such jobs pay higher. However, if a person has to work longer hours, the job becomes undesirable in the long term since they are not able to tend to their personal responsibilities.

• Responsibility: The job of a leader or a chief officer is generally paid a very high salary because of the huge responsibility that they have to take on their shoulders. Of course, they have special skills as well. However, they are highly compensated for their ability to read the situation correctly and take the correct decisions.

• Working Conditions: Lastly, the working conditions also impact the compensation which is attached to a job. Jobs that require people to work in adverse conditions such as in mines or on ships, generally have a higher earning power. This is once again because of the demand-supply situation.

How Earnings Power Helps in Decision Making

It is ironic that we teach young people how to manage their money once they have earned it. However, we do not teach them much about how they can earn more money by making the right choices.

• Education: A lot of people in America are studying subjects that do not have much-earning power. There are people who are post graduating in music, history, fine arts, etc. They are accruing thousands of dollars of loans in the process. If these people were made aware of the simple concept of earning power, they would not have taken the loans to pursue the degree since they would have been aware that they would not be able to make the wages to pay off the loans.

• Vocation: A lot of people happen to choose their vocations based on arbitrary measures. If the concept of earning power is explained to them, they can make a more informed decision about their life which would allow them to live a life that is more suited to their personal values.

• Lifestyle Decisions: Lastly, a vast number of people in America are living a life they cannot afford. They are making imprudent financial decisions since they feel that at a later stage they will be able to earn more money and pay off the debt. If people are more aware of their earnings power, they would either make an attempt to increase it or adjust their lifestyle to reflect their current earnings power.

The bottom line is that earnings power is an important concept of personal finance. It should be taught to young people before they begin their careers. It should serve as a guide for them to make effective decisions.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.