Different types of income: Three common ones to master

Understanding the three types of income

As we age, we begin to see different types of income available from various sources. Those various forms can actually improve your life satisfaction and reduce your financial worries. 

There are three types of income the most basic income we usually know about growing up was that of a future job.

 Even though earning money from a job is certainly important to earn money and be able to afford essential things in life, there’s still more to consider.

I learned how managing different types of income over many years has impacted my life immensely.

In this post, I’ll share the three types of income that you can use to build wealth along with the benefits and drawbacks of each.

Whatever you decide is a personal decision, but always remember the value of more than one income stream.

Related: Guide to saving money for the future

There are three types of income:

• Earned
  
• Passive
  
• Portfolio.
  

Related: 6 Reasons You Should Have an Investing Strategy

What types of income do you have?

Earned Income

For most people, their main source of income is earned income. This is money that you earn through working.

These forms are examples of active income including: 

• Customer service work
  
• Writing and editing
  
• Management
  
• Advertising Sales
  
• Software development
  
• Web design
  
• Marketing
  
• Graphic design
  
• Janitorial work
  
• Teaching
  
• Construction work
  

When it comes to the three types of income– earned, portfolio and passive. There is also a small subset of passive income called non-passive income.

 Earned income is income that is a direct result of your labor. This income is usually in the form of W-2 wages or as small business income reported on Schedule C.

The next biggest source of income for most people is passive income. This is money that you make without working, such as rental property or dividends from stocks.

Finally, a small percentage of people have portfolio income. This is money that comes from investments, such as owning shares in a company or buying bonds.

Did you know there are many different types of income? 

Yep, it’s true! There are five main types: earned, passive, portfolio, capital gains, and business. Let’s take a closer look at each one.

Earned income is money you receive for working. This could be from a job or self-employment.

And maybe, you’ll even move away from earned income and start your own business, become interested in more income producing assets , and discover your path to financial freedom. Whatever you decide is a personal decision, but always remember the value of more than one income stream.

You can earn income in the form of rent payments from a rental property that you own. You can either buy a house specifically to rent it out or simply rent your own house when you decide to move instead of selling it.

Passive income is money you receive from investments or rentals. You don’t have to do anything to earn this money – it can generate income automatically.

There are tons of different examples of assets that you could own to generate passive income.

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Portfolio income is money you receive from owning stocks, bonds, or mutual funds.

Capital gain income is money you make when you sell an asset for more than you paid for it.

It’s called capital gains income because capital gains tax is what you pay for the profit you make. 

Some examples of capital gains income are: Buying and selling stocks, bonds and mutual funds Buying and selling real estate Buying and selling collectibles or valuable commodities like gold.

Business income is the money you make from your company’s business ventures.

This could include things like selling products or providing services, but it doesn’t have to be limited in scope!

You may also find that some of these activities generate more than one form of revenue (for instance if someone hires us as consultants then they’ll pay us either hourly rate plus bonuses based on how well our work meets expectations).

What are forms of earned income?

There are many ways to make money in the world. You can get a part-time job, start your own business or freelancing career.

You can do any number of things that will require some level of commitment and hard work on your end!

For example…

There might not be one single form though because each person has their own unique set: They could collect revenue from selling items they create (like art). 

You could provide services such as consulting where clients pay them for advice about how best to handle certain situations at work/home etc.

Also run small businesses which involve managing day to weekly schedules among other details like hiring employees.

Also, it needs to be noted that salaried income is one of the most highly taxed sources of income in the world. 

In most developed nations, salaried income is taxed at almost 50%! This means that once a person crosses a certain income threshold, their motivation to earn income also reduces because of the high rate of taxation.

Passive Income

The IRS says that passive income can come from two sources, such as rental property or a business in which you don’t actively participate. 

For example if one is paid book royalties on their work and they have enough earnings to get Social Security benefits without working at all – this would count towards the latter category of “passive”.

While there are many ways to make money, one of the most passive is through investment.

Passive income can come from investing in property or stocks which require very little work on your part until they start generating profits for you automatically!

Portfolio income is generated by selling assets and is taxed at the capital gains rate or ordinary income tax rate depending on how long you owned the asset. Interest and dividends are also considered portfolio income. Also easy. Long-term rental income is considered passive income as well.

There are a lot of ways to make money without putting in the hard work.

For example, you can develop your own blog and start monetizing it by selling advertising space or add sponsored posts on to blogs that have been targeted.

This may require quite a bit of work upfront. But when you cater to companies and towards specific audiences who may want their goods/services advertised.

 This will allow you to collect revenue from ads in your sleep.

What are forms of passive income?

Passive 

The different types of passive income that you can generate include stocks, bonds and shares.

Stocks give their owners a share in the company they’re investing into which may be profitable if it does well.

 But there’s also potential for losses as well depending on how things go with this particular investment vehicle!

Bonds work similarly except these provide returns based off an agreed-upon interest rate.

What are examples of portfolio income?

Portfolio 

Portfolio income is any type of income that comes from sources other than just salary, such as dividends or interest. 

This includes stocks and bonds; real estate investments.

Depending on the holding period of the asset, and other factors, that gain might be taxed at ordinary income tax rates or capital gains tax rates. 

Interest and dividends are other examples of portfolio income.

Other Types of Income?

• Interest Income.
  

Interest income is the most important type of non-operating cash flow that a firm can generate.

This source often provides companies with enough funds to pay their interest and principal on outstanding debts or expenses.

Even when they’re not earning any additional profits from operations themselves firms may also choose use this money for other purposes.

Some are to fund investment opportunities which could lead them down another path towards economic growth through increased productivity and hiring more employees.

• Dividend Income.
• Dividend income is a type of investment that provides steady streams of revenue.
  

The first form, stock dividends are payments made by companies based on their shares outstanding. This reflect portioning out profits for each year’s worth to all shareholders who have purchased those same stocks.

For example if I own 100 shares in Company X with an annual yield rate at 5%, then every time they pay me my share.

• Rental Income.
  

Rental income is one of the more stable sources in terms on revenue, as it doesn’t depend too much upon economic conditions or fluctuations.

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For example say you own an apartment building that’s worth $1 million dollars; your monthly rental payments would most likely go up by about 2% every year.

 One thing is sure, there will always be someone looking for apartments with this kind of pricing tier (and at least until next decade).

Since equity offers the highest rate of growth, this can help to maximize the growth potential. 

Next, as the age of a person increases, more and more money should be moved out of equities towards investments such as fixed deposits and rental properties.

You’ll also be eligible for certain tax benefits and be able to deduct certain property management costs, insurance and other depreciation costs from your profit as a landlord. Disadvantages The disadvantages are that you will be responsible for your renters. 

If your apartment is flooded or the neighbors are noisy, you’ll be the one in charge of maintaining the property.

 This will help provide a more stable source of income when the investor finally retires, and the earned income stops. Ideally, every working person should have some knowledge about how the different types of income can be used to generate wealth.

You can earn income in the form of rent payments from a rental property that you own. You can either buy a house specifically to rent it out or simply rent your own house when you decide to move instead of selling it.

 REITs: A REIT (real estate investment trust) is a company that owns income-producing properties. 

When you invest in a REIT, you receive dividend payments either every month or every three months. This is one simple way to earn rental property income without enduring the headaches that often come with owning physical property.

The Drawback 

The other drawback is that investing in rental properties requires a significant amount of upfront investment. This can take a large portion of your net worth, and it’s not exactly diversified: if something happens to the neighborhood or house, your net worth does take a big hit.

That might not seem like a lot but over 30 years those little adjustments add up! And since people tend to stick around longer when they know what their rent+deposits are going to be.

• Capital Gains.
  

Capital Gains is the profit that’s made when selling an investment.

For example, if you bought some stock at $10 and later sell it for $20 then you will have to pay capital gains.

It can also refer to how much money someone makes in their lifetime from all types of investments like stocks or real estate because these things have “returns” on them.

• Royalties or Licensing Income.
  

The best royalty is one that doesn’t require you to do anything.

This type of income comes from the use and sale of your intellectual property.

This means it’s earned when someone uses or buys something made by yourself under an agreement with respect for certain rules set out in law (a contract).

The licenses we discuss here are less about agreements than are based on usage.

Companies pay people who have patented inventions so as long as those patents continue being enforced by court order then this type provides continued revenue over time even if no new contracts get signed!