What You Need To Know About the 4 Types of Income

Money is the foundation of nearly anything that we want to do in life. Most of us are taught that if we want to have a good life that we have to go to college, get a practical degree, and work until we’re 65.

We’re taught to budget and to save for retirement, essentially most traditional money advice teach us to be money managers and to work for someone else. What if there was another way to live and earn money? What if there was a way for you to actually take more control of your money and your life? I want to break down the four different types of income.

What You Need To Know About the 4 Types of Income

Earned or Active Income

What it is: Earned or Active income is the most common way that people are taught to make money. This is the type of income that comes from working a job that requires your energy and time. It doesn’t matter if you’re a salary or hourly worker, it doesn’t matter if you’re self-employed or if you work for someone else.

Pros: Very little money is needed upfront to get started and why so many people rely on this type of income to provide for themselves and their families. It’s also often easy to move from company to company.

Cons: If you get sick or injured for whatever reason then the money usually stops coming in, that is, unless you have short-term disability through your job. If you work a low-paying job it can be difficult to get ahead financially. This is a more difficult way to get wealthy.

Portfolio or Investment Income

What it is: Portfolio or investment income is any kind of income that you make from selling an investment at a much higher rate than what you originally paid for. This is often called capital gains. Most people get started with a portfolio or investment income by working an earned income job.

Portfolio income often includes trading stocks, bonds, mutual funds, CDs, futures and derivatives, selling real estate, selling antiques, etc.

Pros: It’s a much better way to become wealthy. Your money can work for you while you sleep. The money in investments often has a snowball effect or a compound effect, and can create an income on a consistent basis for you.

Cons: You often need to have more money upfront to invest. You need to do a lot of research before you start and many people choose to work with a financial adviser who guides them in how to invest and create a diversified portfolio. It can take a long time to generate and you don’t always have control over how an investment does, which can also mean that you can lose money this way. There is risk involved.

Passive Income

What it is: Any kind of money that comes from any resources that you own and don’t have to be actively working on all the time. Passive income may come in the form of rental income, royalties, an automated online business, affiliate marketing, etc.

Pros: Many people have become wealthy this way. Income can be consistent and you can essentially make money while you sleep. You have more control than with earned and investment income. You don’t always need thousands of dollars upfront like you would with portfolio income. Your income can be unlimited in some cases.

Cons: It’s not passive in the beginning. First you have to decide what your form of “passive income” is going to be, and it can take awhile for you to set things up where they can finally be passive and you see actual cash in your bank account after all your business expenses have been paid for.

For example, if you decide that you will buy a rental home, you first have to make sure it passes inspection, and do any maintenance work on it before you officially rent it out. In order for it to be passive you have to make sure that you make more from your renter than it costs for you to pay for the mortgage, utilities and any other daily expenses that will come up with this rental home.

If your renter pays on time and no maintenance issue comes up then it feels pretty passive, however this might not be passive when your renter calls you in the middle of the night and tells you there is a plumbing emergency or some other house issue that needs to be fixed immediately.

Because of problems that come up with rental income a lot of people have instead started up online businesses where they sell a digital course or another digital product where the customer can get their download immediately. You can set up systems so that the entire online business is automated.

The downside with an online business is that you will need to do a lot of marketing and work to bring traffic to your website. If you sell a course on how to make money blogging you have to bring in people who care about that and are willing to shell out the cash for your course.

The online space also changes pretty fast, and you will have to keep up with any trends and threats to your online business. The good news is that there is still a lot of room for future online business owners to make money.

Everyone brings a unique voice and their unique experiences to the online space and though it seems the online space is saturated, the truth is that not all business owners are for everyone.

Think about this…not all doctors are for everyone, not all lawyers are for everyone, not all baby-sitters are for everyone, not all bloggers are for everyone and not all artists are for everyone.

The world is very diverse and everyone has their own preferences, you might be able to connect with customers that no other blogger or online business owner might connect with, and you could make money by serving your audience.

Inherited Income

This is any type of resource that you inherit via a trust, cash, stocks, a one time payment (lump sum), your parents home, etc. This doesn’t apply to everyone and sometimes there are stipulations that people must meet before they get their inheritance.

Last Thoughts

It’s really important to understand how money works and the different ways we can get money into our lives. While some of these avenues may not be for you, the point is that the options are there, and sure they may take awhile to work toward to but the rewards can be phenomenal when implemented correctly.

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By J. D.

J.D. is a blogger and writer who has a passion for personal finance, with a focus on helping young adults learn about money. When she's not working on her blog, she loves to read and travel.

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