The 3 Different Types of Income – What to Know

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When I was in my early twenties and had my first job as a laboratorian (yes, I once thoughts this to be my career), all I thought about was money, what I could buy with it, where to spend it.

Every paycheck that came, I spent it to whatever was hot that month or day. I didn’t keep any of the money I earned; I just spent it as fast as possible. One of my earliest investments was a new computer. Yeah, I played (and still do to some extent) video games and had to have the latest computer in the market.

 

The 3 Different Types of Income - What to Know juhaekman

 

I also bought a lot of new clothes and all things imaginable. I went partying and spent a nice sum of money on bars and nightclubs. It was fun. I have t admit that. I’m not yet sure do I regret all that spending.

I did come from a family where there was not a lot of money, so when I got money. I had that spending need (obviously). It’s only a natural feeling to have.

For so many years you haven’t had money to spend. So when you finally have, of course, you want to indulge yourself and goods for yourself. It’s natural, and you have all the right to do so.

 

What I could have done differently back then

With all that spending I could have saved the money. I could have saved like 50% of the money received, most likely I couldn’t have been able to save all of the money, but I should have saved at least 50%.

But why? Why should you save, when you are finally getting money to your bank account? The reason is that the money you are spending and the goods you are buying yourself are something you most likely don’t need anyway. You are more than likely spending money on things because you have this void inside you, you are now filling with stuff.

How is this all connected to the different types of income you should know about? Earned income or the paycheck you most likely get currently is only one part of an income you could and more likely should be getting.

 

Diversify your income streams

What might not be obvious for you yet, is that you should have more than one income stream. You have to have more than one path open and delivering money to you.

Your monthly paycheck is only one layoff away from being cut away from you. Do not rest on your laurels and think that layoff cannot happen to you. It can, and you don’t know when that will happen. It will hurt though, when it happens, so protect yourself with diversification.

I have experienced massive layoff closely, and it woke me up radically. The moment I survived a massive layoff, I started to search alternative income streams, and I found them and have implemented them in my life.

Let’s go through the three main income streams you should have in place in your money life.

 

Earned income

What is it:

Earned income is possibly the most self-explanatory one, as it is the paycheck you get for working in a company. You earn income by exchanging your time for money. You work hourly, and you receive a payment for the work made. Almost all of us start to receive money this way, before finding other revenue streams.

 

Examples:

salary, bonuses, contract work

 

Taxes:

This is very much country specific but it’s usually around 10-25% and depends much on the income level you are working on. The more income you get, the more it is usually taxed. You might also have other taxes to pay, like social security, so the overall tax might come to around 40% or more. Let’s just say that taxes take away a lot of your hard earned income.

 

What to think about it:

This is the basic form of income you can get. It is also the worst one as you are exchanging your precious and damn valuable time for the money that is never enough for the work you have made. Your monthly salary feels constant and gives you feeling of security. I think of this somewhat deceiving in the sense that it can be taken away from you any minute.

Then again this is the easiest income type to get. You have to get a job for yourself, and off you go. Nothing else neede to be done. This also makes your money vision so narrow. You only see that job equals money. Like there’s nothing else.

Thankfully there are few more income types you can tap into. The best way is to get somewhat steady income by working full time and spending the earned income to these two different types of income streams which we will talk about next.

 

Portfolio income

What is it:

Portfolio income is income that is generated by selling an investment in a higher value than what you paid for it. Portfolio income is considered as capital gains. The main idea is that you are getting income from an investment you have made in the past. Whether it is from a real estate, stocks, bond, ETF’s, cars, antiques. You are making a profit from your investment and you are collecting items and valuables to your portfolio.

 

Examples:

Antiques, cars, real estate, bonds, stocks, ETF’s and other items considered valuable and appreciating in value over time.

 

Taxes:

Usual portfolio taxation is around 10-30%. Stocks being somewhat in the higher end of taxation but is very much depending on the country you are living on and the country’s taxation policies made with other countries.

 

What to think about it:

This is one of those “safe bets” you can start with when you want to increase your gained income per month. Investing to properties and stocks need a bit of studying before going all in. There are always ways for you to lose money on these. However, with studying and learning about investing, everything becomes easier and to be honest, investing in stocks, for example, is not so difficult. It only seems like it, but it’s not.

Investing in stocks and buying real estate is not that much different than buying a car for example. If you are more into automobiles and know a lot about those. You can always trade cars at higher prices and get some income that way. Though this more than often applies to the older car models that appreciate in time.

Growing your portfolio is something you should consider if you want to make money with your money. Making money work for you and not the other way around, you working for money.

Growing your income portfolio is not an easy task to do and if you can’t save money from your paycheck then this option is pretty much out of the question.

I like to think that diversifying your income is one of the critical things you should do to keep yourself afloat when the bad times start to roll. Having assets in your portfolio make you more immune to things happening out of your control.

You are less dependent on your paycheck and that is all because you have other sources that bring you cash, maybe slowly but steadily. One of those streams are dividends that you get by buying a dividend stock. This is as passive income as one can be. Though it is still considered to fall under portfolio income, and not under passive income.

 

Passive income

What is it:

Passive income, if there is such a thing (maybe dividends are the only real passive income there is). Passive income is generated by assets that you own but don’t need any work from your side. The term passive comes from the fact of you not putting any time or effort into getting money from the asset you own.

 

Examples:

Selling intellectual properties such as ebooks and courses. Affiliate income, rental income.

 

Taxes:

Usually taxed around 20% or less, yet again depending on the country you are living in. This is more than usual taxed as a business gain and so it is taxed most favorably.

 

What to think about it:

Passive income is considered the holy grail of income stream. And yes, I do have to admit it is just that. The key to building wealth is to trade your time for value and value traded to money. It’s a beautiful cycle and many online entrepreneurs and business owners are doing this daily and constantly, me including.

Passive income is somewhat deceiving as a term. It is purely passive but only after you have created the service or a product you sell. After the creation process, it becomes a passive income generating asset for yourself. Not before but after.

One of the beauties of passive income is that once you have created the service or the product (intellectual property) you can sell it indefinitely if you have made your product such a way and you should. Making it evergreen and not making it obsolete in the next 12 months.

Rental income is somewhat passive if we assume you buy a house and put it to rent as opposed to building a house and then putting it to rent.

Passive income is one you should strive for if you are creating an online business for yourself. Consulting, freelancing, VA (virtual assistant) work is all good work and something you can definitely do even if you work full time. Online business enables you to do lots of things with the whole wide world open for you.

Passive income, however, is the thing when it comes to building wealth as it requires zero to little time on your part.

If you want guidance on building your blogging business just check my blog post: How to start a blog – Ultimate beginners guide.

The mentioned guide will give you a solid base to start designing your blog and online business and start receiving passive income relatively quickly.

 

The 3 Different Types of Income - What to Know juhaekman

 

A final note

All income types are something you should have in your life. While I might say that salary and earned income is something you should get away from. You more than likely start from there.

When you have a steady paycheck and you are able to save some money from it. A good way to invest your money is to get yourself a portfolio and start adding assets there. Real estate, antiques, stocks, bond, ETF’s.

Adding assets to your portfolio makes your wealth stronger and more resilient to bad times. You have something you can use if things get very rocky and all things fall apart.

A portfolio is one of the easiest ways to grow your wealth. Investing in stocks, need a bit of study and if you want to play it even safer, just buy ETF’s as they have diversified stocks, bonds and what not (depends on the type of ETF you buy) inside them. I have owned ETF’s in the past and find them rather secure.

When you have established a good touch to your money, to your spending and needs. You might want to start to invest in yourself, build a business and bring value to the world. With value, you earn money faster and greater than portfolio income can give you.

Starting a blog and an online business is a lot of fun and I think is the best way to earn income.

However, these are not easy things to take action on. It all depends on the situation you are currently living in. If you don’t have a steady paycheck, then that could be the first thing to take action on. It really depends on the situation.

 

Want to remember this? Pin this ‘The 3 Different Types of Income’ post to your Pinterest board for later reading!

 

 The 3 Different Types of Income - What to Know | investing | debt management | save money | income types | passive income | earned income | portfolio income | salary

 

Bring in the discussion

Do you want financial independence, do you want to retire early? Do you believe in hard work, do you like to save money rather than invest? There are many questions you have to ask yourself before you decide the path you’re going to walk. I chose online business, because of the almost limitless possibilities it gives you. Leave a comment below and share what type of income you currently have?

Disclosure: I’m not a financial adviser and the articles information should be considered as general information and nothing else.

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