While wealth represents what a person owns, income is what he or she makes in the form of consistent recurring cash inflow. If your outflow is smaller than inflow, i.e. you are able to save money then that would allow you to accumulate wealth over time. There are three types of incomes out there. Earned, portfolio and passive income. Let’s unpack each of them.
1. Earned Income
It is generated by exchanging your time for money, i.e. by actively working without any further leverage on your time. The obvious upsides to earned income is that it doesn’t require any initial capital and doesn’t seem to contain any perceived risks. These are the very reasons why most people work their entire lives. It is estimated that there are total of 127M full-time and about 27M part-time employees in the US as we speak.
The not-so-obvious gotchas to earned income are very “limited upside” and “unlimited downside”. Are you serious? We have over half of the population (154M or 50%) doing it! Yes, with earned income, financial upside is limited to inflated-adjusted pay raises and some pay-for-performance raises which are never in double digits (unless you jump employers and or re-skill yourself). Yet another upside to this income is that it provides you with quick savings which you can use as a springboard to making other types of incomes. As to the downside, you can lose your job anytime, as there is no such thing as job security in the current hyper competitive environment. If you work part-time, you can make extra income only by working extra hours. With earned income, you are also bound to pay higher taxes!
2. Portfolio Income
This type of income comes from buying something (let’s say stocks) low and selling high. Portfolio income requires knowledge of finance and domain (say real estate, or trading) you are using to generate it. Once you have mastered a given domain, you can easily repeat through the cycle of buying and selling forever to compound your income.
The gains are termed as “capital gains”, are taxed lower (than earned income) and even more so if you held the underlying instrument longer than a year. At the time of filing your taxes, unlike earned income, you can also account for the costs involved.
3. Passive Income
Passive income comes from valued assets that you have either created (e.g. Kindle books or an online course) or acquired (e.g. real estate). Rental income is an age old example of passive income. While there is hardly anything totally “passive” income, however the keyword here is the LEVERAGE that passive income provides you with. What am I talking about? With passive income, you no longer exchange your time for money. It comes in whether you show up for it or not. This is the primary reason why passive income is considered the “holy grail” of investing and key to long-term financial success and wealth.
Let me also summarize SIX more benefits associated with passive income.
- It is a recurring income, which leads to compounding
- It provides you with better tax treatment (you can account for costs)
- It can be scaled easily since you are no longer trading your time for money (i.e. you can build a support system which consists of software-based automation which is common in online businesses and outsourcing to high skilled labor virtually anywhere in the world)
- It can be used to maximize your retirement savings. You can move your 401K to a Rollover IRA and then self-directing it to investing (not trading) in fundamentally solid stocks for multi-fold returns over decades.
- It can provide you location independence. Online business are great examples of that, where you can work from anywhere you want.
- It can be used as a bridge to switch careers or reclaim your soul from corporate. For example, if you have a family and you are trying to transition from a full-time job to running your own online business.
Online Business Mastery Course Preview – Income Types
Who am I?
I run multiple highly profitable six-figure online businesses. Last but not least, I discuss this topic and techniques in detail within my Online Business Mastery Course. You’re definitely missing it out, if you have not checked it out already. For a Limited-time, Module 1 of this course is available free of cost.b Signup now to claim your instant access!
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