The Three Types of Income

Dear Young Income Seeker, Today I am discussing the three types of income. This knowledge is important because it is related to the concept of having multiple streams of income. 

Perhaps you have heard that the average millionaire has seven streams of income. Because I encourage young people to create multiple sources of income, it is important that you know the type of income that you can create. After I give you the descriptions, I will touch on what I have had in terms of the three types of income. So, let’s get started.

The Most Common of the Three Types of Income

The most common type of income is active income. 

Actively working earns you active income. With active income, you are essentially trading your time for money. 

An example of earning active income is when you go to work and are paid an hourly wage. So, if you are a sous chef in a restaurant, you are earning active income, perhaps for an hourly wage. 

Even if you make a higher hourly rate, like a doctor, lawyer, or engineer, you are still trading your time for money, earning active income. 

Other forms of active income include bonuses, commissions, and tips. 

Some ways that you can increase your active income is by getting a raise, getting a higher paying job, getting a side job, or starting a side business.

Active income is the easiest type of income to start. This is because everybody has the asset of time, which can be traded for money. So, while everybody isn’t paid the same amount of money for their time, everybody can at least get SOME money in exchange for time. 

A Second Type of Three Types of Income

A second type of income is passive income. 

If your physical or intellectual properties earn you money, that is passive income. This type of income does not require your active involvement.  Rather than you trading your time for money, you essentially rent physical or intellectual property.  

For example, if you own a rental property, let’s say a restaurant building, that property is an asset.  You would earn income in the form of the rents that the restaurant business owner pays you. 

That money earned on a rental property can be mostly passive, if you spend only a few hours a month managing the property. Or, it can be considered completely passive, if you hire someone else to manage the property. 

Some assets that people can pay you for using include things such as residential and commercial rental properties, things like cars, tools, storage units, and intellectual or creative ideas like music or books that you write. 

The Last of the Three Types of Income 

The last type of the three types of income is portfolio income. 

Portfolio income is income earned from your financial investments. 

Examples of portfolio income include money that comes from stocks when they are bought and then sold, or when you earn dividends from stocks.

So, if you own stock in the McDonald’s Restaurant chain, and you earn income from selling that stock, that would be considered capital gains, and that would be portfolio income. 

Likewise, the dividends earned from owning the McDonald’s stock would be portfolio income.  

Other types of portfolio income includes interest earned from savings accounts, CDs, and bonds. 

You can think of portfolio income as having your money work for you.

Things To Keep In Mind As You Think About Creating The Three Types of Income

As I said earlier, earned income is the easiest of the three types of income to start earning, because everyone has the asset of time, which can be exchanged for money. However, there is a limit to how much time a person has to trade for money. 

Passive income comes from assets that you let other people use. But, keep in mind that money is often needed to purchase the physical assets. Alternatively, you will have to put in time up front to create an intellectual or creative asset. 

Portfolio income comes from financial assets. However, you need to have capital* to buy these assets. So, it takes time to build up these assets, because usually you have to begin to earn that capital through active income.   

(*Money used to buy assets is called capital.)

Now That You Know About the Three Types of Income…

Key Takeaways About The Three Types of Income:

1. Active income is money that most people make, by trading time for money. 
2. Passive income is money that is earned by allowing other people to use your physical or intellectual assets. Mostly this income comes in the form of rent. 
3. Portfolio income is money that is earned from your portfolio of financial assets. Types of portfolio income include interest, dividends, and capital gains.  
4. A person can have all three types of income. 
5. The easiest of these incomes to get is active income. 
6. Once you have active income, you can use some of that income to start building the other two forms of income. 
7. You can use some of your current after-work time and/or time off to either increase your active income or to create something that can bring you passive income. 
8. It is a good idea to have all three types of income, especially in your early years, before you have enough passive and portfolio income to live on. 

What I Have Had in Terms of the 3 Types of Income

My Active Income

Just like many people, I started with active income. In my early teens, I had two jobs. I was able to get a part-time job in a “corner store.” Even though I was not related to the owner, we had the same last name. So, I think that he decided to give me a chance when I appeared across the counter asking for a job.

Around that same time, I also had my first foray into entrepreneurship. My godmother had moved into retirement housing. Because I always enjoyed spending time with senior citizens, after visiting her and meeting with her new neighbors, I decided to start a cleaning business that focused on serving senior citizens. Over the course of my lifetime, I have learned active income by working in insurance, education, and managing housing for the United Stated Military.

My Portfolio Income

My second type of income was portfolio income.

When I was in third grade, my mother decided that my neat handwriting made me the perfect person to take over writing out all of the checks to pay the household bills. One of the monthly bills was the electric utility. At some point, they started including an offer to buy stock directly from the company.

I know that at this point in history, people under the age of 21 years old cannot buy stock on their own. However, at the age of 16, I did not know anything about any related age restrictions. I don’t remember anything asking about my age on the application. I am not swearing that it didn’t. But, whatever information that I needed to provided did not disqualify me from the purchase.

So…I went to my bank, withdrew some of savings earned from my active income, and got a money order.

The next time I wrote out and mailed the electric bill payment, I included the stock application and payment. Voila! I now owned my first stock and started receiving portfolio income four times a year.

My Passive Income

Over the years, I have owned three separate rental properties. The properties got larger and larger as I acquired them. The individual properties provided me with passive income ranging from approximately $5400 a year to over $3000 a month.

While I now wish that I had kept those properties, I have sold them all. But, I have plans to purchased another property within the next three years. At this point, I am considering purchasing a multifamily in either Huntsville, Alabama and/or some place in Florida.

Because of the jobs available in Huntsville, Alabama, it has been named one of the best places to live. Another thing that makes Huntsville attractive to me is that it is less expensive than northern areas where I have mostly lived.

My attraction to Florida is that it has warmer weather than my current northern location, and that Florida has no state income taxes, no estate taxes, and no inheritance taxes.

Please wish me passive income luck!

My final words…                                                     

The most important thing to remember is that, while you most likely have to work to earn money (active income) in the early part of your life, ultimately, you want to take as much of that money as possible, and shift it into things that create passive and portfolio income. 

It is my hope that you will be able to join what I call the “WOOL” movement. That “WOOL” stands for Work Optional, Optimal Life. 

Love & Hoping That You Successfully Plan and Pursue All Three Types of income, 

Rich Mom

Looking for more financial resources? Check out the Rich Mom Poor Kid Resources Page.

Who is Rich Mom? 

If you’re wondering who Rich Mom is, check out my “About Rich Mom” page. 

Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor. 

The information shared here is not intended as financial advice, just encouragement and entertainment.  

Note:

A good way to start on passive income is to start to keep your savings, emergency funds, rainy day funds, and any other savings accounts in a high yield savings account. 

At the time that I am writing this, my favorite place for high yield savings accounts is Marcus by Goldman Sachs.

Goldman Sachs is an investment bank that has been around for about 154 years, and their online Marcus Bank offers some of the highest yields that I have seen. 

In addition to their high interest rate, if you would like to use my link, they are offering 3 months of an additional 1% on top of their already high interest rate, while the offer lasts. So, as I am writing this, their 4.50% would be bumped up to 5.50% for 3 months.  

(Here’s my link: Marcus by Goldman Sachs )

Be sure to check out the offer online to make sure that you are comfortable with it, and feel comfortable that this is not a scam. It’s not. But, there are lots of scams out there, and I encourage you to always verify any offers before you sign up.