Family income is the basis of economies. The income received by the smallest economic unit is the foundation of wealth for the economy as a whole. A free-market economy consists of the voluntary exchange of goods and services between individuals, also called households or families, and firms, also called companies. A family income is the revenue received by a household from all sources, including wages, investments, gifts, and trades.
In a free-market economy, individuals and privately owned firms control the factors of production, which are property, labor, and capital. By freely exchanging goods and services, innovations in production methods allow economies to grow. The family income is not fixed but open to opportunity. As the family grows in spending power, the firm can increase production by hiring more labor, which causes increases in income for more families.
In controlled economies, the government controls one or more of these production factors. Under these governments, family income is not based upon performance but rather on other factors. For example, under European feudalism, serfs worked land owned by noblemen, and the family income was arbitrary. The ability of the economy to grow as a whole stagnates when work output is not rewarded.
Families are usually first thought of as social structures, and second, as economic units. Traditionally, families are small groups of individuals related by marriage or birth. The relationship between individuals in a household unit is of no relevance in economic theory but may be of importance within the group. Most law systems recognize the family unit as having reserved benefits such as the passing of possessions from one generation to another.
In many families, discussion revolves around the income generated by the parents or the adult members of the household. This is not always the case. The labor of children as farmhands or nannies avoids the expense of hiring help. Children may also work outside the home and direct their earnings back into the family.
Planning helps maximize family wealth. Budgeting, maintaining employable skills, and avoiding external threats to family wealth are a few of the planning activities. Some threats are anticipated, such as future college expenses, and some are unpredictable, such as loss of income due to illness or injury. The average family income is a valuable economic indicator of a country’s financial condition.
Some families choose to include all household members in family financial planning activities. These parents believe allowing children to share financial obligations for some relevant items, such as entertainment or clothing, prepares them to manage money more successfully as adults. Other parents would rather introduce their children to sound financial habits as the children near adulthood.