The Different Types of Income Everyone Should Know About: An Overview

The Different Types of Income Everyone Should Know About: An Overview

Did you know that your 9-5 job isn’t the only place to earn money? If you plan to create informed financial goals and use the money to your advantage, keep reading till the end. This article talks about income, the different types of income, why is it important to have many sources of earnings, and the benefits of having them.

What is Income?

An income is a money you receive for providing services and goods and investing capital. A company’s income is also the money it receives for the products/services it offers. Individuals receive income via salaries or wages. Both individuals and companies must pay tax on their income.

Importance of Understanding Different Types of Income

You can make informed decisions, explore investment opportunities and prepare for a financially stable future if you understand the different types of income. You can make long-term decisions by looking at the tax rates and deadlines for passive and portfolio income streams.

Other benefits of understanding different types of income include:

  • Reserving money for retirement 
  • Being financially confident and secure 
  • Paying off loans and debts
  • Using your hobby and passion for money
  • Investing money 
  • Leaving full-time job
  • Gaining wealth over-time
  • Supporting families with more income
  • Entrepreneurship

Different Types of Income

There are 3 types of income you can have. Let’s see what are those.

1. Active or Earned Income

Active or earned income is the money you earn from your job. You provide services and give your time and energy in exchange for cash. The paycheck you receive at your 9-5 work is your active income. It’s in wages, salaries, commissions, and tips. Some examples of active income include:

  • Sales
  • Software Development
  • Janitor Work
  • Marketing
  • Writing and Editing
  • Teaching
  • Construction Work
  • Management
  • Advertising 
  • Web Design
  • Graphic Design
  • Customer service work

2.Portfolio Income

The income you earn from investments like dividends, royalties, interest, and capital gains is Portfolio income. You use portfolio income to earn extra cash and save for your retirement. Portfolio income is also known as

  • Capital gains income
  • Royalty income
  • Dividend income
  • Interest income

Some examples are:

  • Buying Stocks at a low rate and selling them when the values increase
  • Having a savings account to earn interest, fixed deposits
  • Purchasing dividend exchange-traded funds 
  • Investing in peer-to-peer loans
  • Royalties (for example- musicians earn royalties when their music is played on radio or Spotify and used in movies)

3.Passive Income

Passive income is the money you earn from a business you’re not directly involved with, rental properties, and limited partnerships. Passive incomes require investment and time to get a profit. It can provide you with a large sum of regular income without needing to put in any effort. Other types of passive income are:

  • Renting properties
  • Buying a blog or a website
  • Renting or leasing equipment
  • Sale of independent merchandise from a website/blog
  • Receiving loyalties from online book sales
  • Becoming a silent investor in a business

Benefits of having multiple income streams

Having different types of income means you don’t have to rely on just one source of income. If that income stops for any reason, you still have sources from where you can earn money. You won’t have any financial pressure. You will still be able to pay your bills and keep your belly full.

If you want to build a lot of wealth, having different sources of income is a must. With multiple income streams, you can quickly accumulate a large amount of wealth within a short period. 

Increasing your earning potential will help you focus on your work and relationships. 

Why making money is different from building wealth?

You can make a lot of money and still not be wealthy. High income doesn’t necessarily equate to having a vast amount of wealth. You earn a lot but spend almost 98% of it by the end of the month. It implies your living expenses are equal to or higher than your income. 

You build wealth when you spend less than you earn, invest the money you save, and create multiple income streams. Many people have generated 8-figure money just by investing in the right places. Investing can include buying stocks, bonds, properties, real estate, etc.  Rich vs. wealthy may seem similar, but they are not the same thing.

Wealth building takes time. It permanently secures your future financially. 

Conclusion

Many working people know about the types of income. But most don’t know how to use them to build holistic wealth. If you want to expand your earning capacity, you must research all the different types of income available. Try using all of them. You can refer to books like “The Rich Dad Poor Dad” by Robert Kiyosaki and the “Psychology of Money” by Morgan Housel to invest.

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