Understanding the three types of income
The three types of income are Earned income, Passive income and Portfolio income. Realistically, we cannot work forever, regardless of the overly optimistic thoughts of too many people.
There are 3 types of income. Here we take a look at the different types.
1. Earned Income - obtained from working for someone or a company.
2. Passive Income - income generated from business.
3. Portfolio Income - income generated from investments in paper assets.
Earned Income comes from having a job in a company or in someone else’s business. You get paid for your time and services rendered. In the previous section, we mentioned that workers work just hard enough not to get fired and employers pay just enough for workers not to quit.
This indicates that the income an employee can generate from working for an employer is limited. There is the possibility that an employee may devote extra effort thinking the employer will pay him/her more. It is a rare possibility particularly when business is difficult, but possible.
And even if it happens, it is still limited. Whatever additional profit gained by the employer as a result of the employee’s extra effort, the employer will get the bigger “slice of the pie.” You are, in effect, making someone else rich through your added effort. Do not think I am discouraging this. It is a good act. I’m just stating a fact. It’s likely that you will be telling yourself mentally: “Hey, that’s not fair.” Fair or not, that’s the way life is, when you work for money.
If you are an employee, you get your money or paycheck after everything else. It is earned income, less taxes and everything else deductible, before money reaches your hand. And if ever the money reaches your hand, the next place it is bound to go is to pay your bills. If the amount is not enough, you are bound to borrow, which makes you debt-ridden if it accumulates. Now, this is one big mistake. Do not ever get debt-ridden. It is the quicksand to poverty.
Earned Income is a safe way to generate an income. There is not much thinking to do. Except for a few high paying, a high profile job, your work is mostly concentrated on a few things where you keep repeating the same functions. Unconsciously, this discourages creativity, so boredom starts to set in. It is because of this boredom that getting to work every morning is such a drag and you keep on looking forward to weekends, holidays, and vacations.
Unless you really love what you do without consideration to the income it generates, or unless you are highly paid, or unless there is a lot more to learn in your job, or unless financial security is of no importance to you, there is no reason for you to stay long in the “rat race.” The earlier it is to get out of the trap, the better chances you will attain financial success.
Passive Income is generated from businesses. You can sell products or offer services, or a combination thereof. Examples are buying/selling real estate, trading merchandise as in wholesaling and retailing, etc. In many cases, you need not be physically present in your place of business.
There are also small businesses like vending machines where you hardly require an employee to visit those machines for refill (since you can do it yourself). You can also go with franchising; either be a franchiser or a franchisee. The list is endless as long as you do what you love to do. The beauty of going into your own business is that you work for you, not for someone else. You enrich yourself, not someone else. Your time is disciplined but more flexible and offers true freedom because you can make your own schedule.
Another advantage of going into business, especially in your own corporation, is that you earn and spend before tax is deducted, unlike being an employee where you are taxed before you spend.
Portfolio Income, just like passive income, is making money work for you. Portfolio Income is generated from paper assets like bonds, stock market, certificate of deposits, and mutual funds. They are called paper assets because literally, they are businesses that revolve on papers.
It is in portfolio income where financial knowledge is of vital importance. Your intellect interacting with creativity can either unmake or make you rich.
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