Most people associate income with the cash they earn from working in the office for a 9-5 job. However, there are actually two other income types that one can be earning even without consuming much of their time. An individual has the potential of setting themselves up for financial freedom if they combine these three forms of income.
So, what are the three types of income? Well, you have active income, portfolio income, and passive income. Read on to learn more about them.
What’s Active Income?
Active income means income received by an individual from doing a job, and includes payments, tips, commissions, wages, and regular income from companies where there’s no material involvement. An accounting assistant who works for an hourly paycheck, for instance, earns active income. Some other examples of active income may include a nurse who earns an income from home on a part-time basis, or a computer programmer who’s paid on a full-time or part-time basis. Some individuals who earn income this way are employed by public schools or churches. Other people earn money by becoming an entrepreneur through the sale of products.
How much active income do you need to support your lifestyle? Even in this day and age, many people can make enough money to live from doing a job that isn’t necessarily lucrative. If you’re able to do some things yourself, do so. If not, find someone or something else that can do it for you.
What’s Passive Income?
Passive income is money that requires very little to no work to make and keep. It’s known as passive income because the income accrues to the investor through a predetermined process. Examples of passive income are rental income from buildings, income from the services of professionals, such as accountants or lawyers, and any other business activity wherein the person or group of people that makes the money doesn’t actively participate in the work. Because passive income doesn’t involve an active contribution, most investors don’t pay taxes on it. Some other passive income ideas include crowdfunding, selling books, and even affiliate marketing.
Passive income is commonly used by companies to reduce expenses while increasing profits. This type of income is normally taxed at a much lower rate than other forms. The tax advantage is the company only pays taxes on the passive component of the business’s income, meaning any profit that would’ve been taxable under other circumstances isn’t taxable as long as the activity is being done for business purposes and not personal purposes. As a result, the company can offset the cost of doing business and, then, use the amount to handle other costs.
The income may be reinvested as capital for further expansion. The amount of capital used depends on the size of the company and on the type of business being operated. In some cases, the company must pay taxes on the part of the income that’s derived from the passive component of the business, but it’s typically small and the amount is minimal.
What’s Portfolio Income?
Portfolio income refers to earned money through owning and selling investments. If you own shares in an investment fund, then, you can earn income from the profit you generate from the fund. The fund is often managed by financial advisers who can help you find high-yielding investments that will make you money over time. Portfolio income can also refer to money earned through having investment assets that generate money for you.
Portfolio income works by first choosing an investment fund or set of investments that will earn you money. The best way to do this is to choose an asset class that’s highly correlated with the market, such as bonds, real estate, stocks, or mutual funds that track indexes or other economic categories that have a history of being able to withstand a significant amount of market fluctuation. You, then, choose funds in these asset classes that are rated on their ability to consistently make money. By doing this, your risk level is significantly lessened and you’re more likely to earn money in a down economy. This is a great way to increase your retirement savings, especially when there are a lot of asset class choices available.
Dividends and interests are two of the most common forms of portfolio income. Dividends are the payments you receive on your investment, usually in the form of a regular check, while interest income is the money you get from having an investment or saving account that earns interest for you.
Having a solid understanding of these three types of income is very important. It’s essential to note that this post doesn’t imply that one income type is better than the other. Which of the abovementioned income types you should focus on is still a matter of personal decision. Nevertheless, dipping into the three types of income is the best way of generating the most amount of cash possible. Planning your forms of income out can have money work for you eventually instead of the other way around.
Ellen Garza is an aspiring writer who uses her blog to produce content on business and finance. Ellen is personally interested in these topics and spent years in learning more about how these industries work.
Today, Ellen has hundreds of loyal readers from different parts of the globe.