A Simple Guide To 3 Types of Income – Pros & Cons

What kind of income are you earning right now? Would you like to have more than one source of income? Then, consider different types of income and make more money. 

With today’s gig economy in our global world, a regular paycheck is just 1 income stream. 

If you want to make more money, know the different types of income and how they can help you build long-term wealth. 

3 Main Types of Income

1. Earned Income

For individuals, earned income is the most common type of income they receive in return for their time and services. This income is usually earned by self-employment, working for a firm, or in your own business. It refers to salaries, commissions, wages, or profits. 

Many people confuse this income as if it only includes earning from the office cubicle, which is not true. The income you receive from surveys and side hustles like proofreading or product testing, as well as performing services or selling products online, is part of an earned income. 

2. Passive Income 

Passive income is the income you earn from investments. These can be by owning assets or other commodities. The investment income doesn’t require you to actively work as you do for the earned income. Rather, you put your hard-earned income into long-term investments and get a return. 

Most people step into passive investments after spending some time-saving money from their earned income. Passive income can be riskier, as you need to spend your money smartly in the right place to make a perfect in-flow of cash.

3. Portfolio Income

Portfolio income is the income you receive when an asset or any other investment is sold. 

In this type of income, you do not actively generate money over time but get it all at once when you sell your investment for a profit. For example, if you bought a stock for $150, and sold it for $200 after a few months, then the $50 profit would be considered portfolio income. 

Anything in your possession (portfolio) increasing in value over time would be considered capital, and making a profit by selling them would be called capital income or portfolio income. 

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The most common portfolio items include: 

Advantages and Disadvantages of Income Types

Earned Income

Income without risk of lossMore stable than other types of incomeLow-income workers get tax breaksFaster than other income typesRequires physical and mental attentionRequires more working hoursNeeds an area of expertise to earn

Passive Income

No physical activity requiredProvides financial stabilityImprove cash flowGet paid instantlyRequires smart investing Knowledge of investing techniquesNeed money to buy passive investments 

Portfolio Income

Diversifies your overall incomeHigh returns on long-term holdingsNeed to keep money invested for the long term in the shape of assetsRequires initial investment to start earning

What Are the 7 Most Common Types of Income Streams?

Earn by Selling Products or Services 

The first and most common source of income is selling a product or service, which is, by far, the most used option by people worldwide. 

Such an earning is an example of earned income, where you run your own business and invest time and effort in return for money.

Income From Interest

Income from interest is a great example of passive income. 

If you have a lot of spare cash in your bank account, why not use it for something more profitable? Many people in business use this money to convert it into a passive income stream by investing in a savings scheme. 

One of the most popular ways is to buy a government bond, which is safer than other investing methods.

Income From Dividends 

Dividends are an example of portfolio income. Once you buy company shares, it is entitled to pay you dividends. These investments can help you generate a healthy amount of money over time. 

We highly recommend investing in stock dividends as they offer more consistent cash flow with lower risk as you get money at regular intervals.

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Income From Stocks

Stocks are another great example of portfolio income. Consider searching for the best companies in the market and investing in their stocks to build good income over time. The value of stocks changes as per supply and demand.

The simple rule applies: If the demand goes up, the price goes up, and vice versa. 

We highly recommend you diversify your stock portfolio to reduce the overall risk.

Income From Property Rental Services

If you own a property, you can always rent it out to get some passive income. The U.S. The Internal Revenue Service (IRS) noted that an annual average of $97,000 in rental income from about 17.7 million properties was declared by 10.6 million landlords. 

According to Statista, 34% of American households rent almost 44 million housing units in 2021. With an average U.S. household comprising 2.6 people, 35% of the population, or around 114.4 million, live in rented homes.

Royalty Income

Royalties are a great source of passive income. When you charge someone for using a product or anything unique, you have created it out of your imagination, and it becomes royalty. Music, books, and artwork are prime examples of creations that generate royalties. 

In 2020, the yearly revenue generated by creators’ intellectual property rights (IPRs) for songs and master recordings owned by record labels had reached $40 billion, with an expectation of an annual 9% continued growth through 2030. 

Job Salaries

According to the Bureau of Labor Statistics (BLS), there are 120.2 million full-time wage and salary workers receiving median weekly earnings of $1,070 in 2022. 

Job salaries are the most common example of earned income and are generally considered a safer option many prefer over other income sources. 

How Can You Increase Your Income?

The best way to increase your income is to participate in passive investments. As discussed earlier, passive income doesn’t require you to actively work, so you can easily manage your passive investments while doing your conventional job. 

Some of the best passive investments in the market right now include:

What Is an Ideal Income Range?

CNBC states that an ideal income for life evaluation is $95,000. However, if you want to live well emotionally, anywhere between $60,000 and $75,000 would work. 

Many jobs in the U.S. pay $60k to $75k per year. Some of these jobs include:

  • Truck driver
  • Police sergeant
  • Agricultural specialist 
  • Environmental scientist 
  • Distribution manager
  • Research manager

Frequently Asked Questions (FAQs) – Types of Income

What Is Considered Income?

Any amount of money you receive in return for your services will be considered income. These include wages, salaries, commissions, profits, etc. 

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What Is the Main Source of Income in the US?

Salaries and wages are the largest sources of income. Most people in the U.S. are working as employees rather than entrepreneurs.

Why Is the Source of Income Important?

The source of income plays a vital role in the overall growth of your income. A diversified portfolio of your income streams would allow you to generate more cash per month. 

Does Income Include Tax?

Gross annual income is your pre-tax income. The total income tax on your income depends upon the overall tax rate in your area.

Conclusion – Types of Income

Some of the income types mentioned above may not be your cup of tea. Nevertheless, the fact that these options exist can be both reassuring and motivational. 

Know and be inspired to diversify your income into multiple streams. Earning more money will help you be well on your way to financial empowerment. 

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