Unraveling the Trio of Income Streams: The Key to Understanding Your Financial Health.
EARNING MONEY: Understanding the Three Types of Income
Written by Marc Andre, Last Updated: December 6, 2022
*Sponsored Post*
There are several ways to earn income. These range from regular jobs and freelance projects to investments and passive income sources. Knowing about these and how to mix them will help stabilize your financial situation. Let me explain the three main types of income, why they’re important, and how they’ll affect your finances.
1. EARNED INCOME
This is the most common type of income – the money you make from employment or freelance work. It includes your salary, bonuses, commissions, tips. Whether you’re a company employee or a freelance contractor, the money you make from your job is counted as earned income. However, it’s good to note that it’s limited by your working hours and physical capacity.
2. PORTFOLIO INCOME
This is income from your investments. It covers earnings from things like stocks, mutual funds, bonds, real estate investments, and more. The difference here is, once you’ve made the initial investment, the money starts to roll in with very little additional effort. There’s potential for growth, but there’s also risk involved as market performance can be unpredictable.
2.1 INTEREST INCOME
Interest income from investments like savings accounts, money market accounts, CDs, and bonds. They are steady and predictable but offer lower returns compared to stocks and mutual funds.
2.2 DIVIDEND INCOME
A company can either reinvest profit back into the business or distribute it to its shareholders as dividends. So, if you own shares in a company, you can earn income through dividends.
3. PASSIVE INCOME
Passive income comes from activities where you don’t actively participate. This could include rental income, royalty earnings, pensions, or profits from businesses that operate without your daily involvement. Most passive income sources require an initial investment, while some can start even without money upfront.
3.1 RENTAL INCOME
This is income from renting properties – residential, commercial, or unconventional like camping vehicles, trucks, cars or storage spaces.
3.2 BUSINESS INCOME
When you have a stake in a business that operates without your daily input, that’s passive income too.
3.3 ROYALTY INCOME
Royalties come from selling or licensing your own intellectual property like books, music, software, etc.
HOW TO TRANSITION FROM ACTIVE TO PASSIVE INCOME
If you’re aiming to transcend active income and attain financial independence, consider creating multiple streams of passive income. Begin with dividend-generating investments like stocks and real estate crowdfunding, and venture into low-maintenance businesses or rental properties. The key is to remain committed and consistent with saving, investing, and expanding your portfolio.
FREQUENTLY ASKED QUESTIONS
1. What is the difference between active and passive income?
Active income refers to earnings from direct labor, such as salary or wages, while passive income comes from sources that require minimal active participation.
2. Are all types of income taxed?
Yes, all forms of income are taxable.
3. How can I make passive income without any initial investment?
There are passive income apps that generate money autopilot and you can also leverage signup bonuses to make an initial investment.
4. What are some ways to generate passive income if you have money to invest?
Consider investing in dividend stocks, rental properties, and other passive income-generating assets. One option is creating digital products like e-books or videos for sale.
To conclude, understanding these different types of income and how they affect your financial stability can help generate multiple streams of passive income. Starting small with little effort, you can gradually increase your income until you no longer rely on active income streams.
