The three types of income: learn more about them

Learn how you can have multiple income streams and build your wealth faster.


Learn about different types of income and grow your wealth

dollars bill wallet
Learn about the three types of income. Source: Freepik.

Whenever you talk about finance, you will come across the term “diversification”. This word is often used in the context of investments. Unknown to many people, however, is the idea of income diversification and the three types of income to make this happen. 

We tend to think of income in terms of occupation. This means we expect an influx of money to be provided by one activity in which we specialize.

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But this is a limited way of thinking about income. It limits your ability to grow richer by making you assume that is all that you can do to have a source of income.

In reality, there are a number of ways you can add income streams to your finances. Of course, if you already have a job, you have limited time. But income does not need to come from a second occupation.

In fact, you can find income sources that will take you almost no time once you have set it up. We call this “passive income”. The income that comes from work we call “active income”. There is a third type of income which comes from investments. This we call “portfolio income”.

This third type requires a fair bit of saving. If you have a hard time saving, click the link below and learn how to start saving money like a pro.

So, without further ado, let’s jump right into it and see what these three types of income are about.

Active income

Your active income, as mentioned previously, is the money that you get from work. Sounds simple, right? That is because this is the most commonly known form of income among the three types.

Most people grow up with adults hammering their ears off with cliches about working hard. Cliches are often repeated without the people repeating them actually understanding them.

So we grow up thinking all we have to do is find a job and work that job. This is an almost certain road to staying poor and never making any progress.

Working hard actually means working smart. Smart does not come easy. Smart is hard. It takes time and effort for one to become smart, but once you do, the world is virtually boundless.

When it comes to active income sources, you should always aim at doing jobs that pay you the most money for the least amount of work. The problem is, that these jobs usually require knowledge of some sort. Hence, you need to be smart.

College education can help, but it is not the only way, and in some cases, it is not even the smartest way. Educate yourself. Read books, watch tutorials, and get inspiration from others.

Active income is one of the three types of income that will take you the most time, so be smart about it and do not waste your life.

Passive Income

happy business man with different types of income
You have to work hard for passive income. Source: Freepik.

Passive income can be a misleading term, at least in the beginning. Of course, we do not have a better term, so we will keep calling it that.

But it can be misleading because you may think you simply do not work and the money keeps coming in. It is not exactly that. The idea is that you work a lot less.

At first, passive income streams usually require some form of upfront investment. This investment can be either money or some form of work.

For example, writing an e-book and putting it up online for sale. You had to put in the hours to write the book and learn about online marketing. This can be a lot of work.

But once you have done the heavy lifting, the product will be online for as long as you want it to be. All you will have to do is to manage the marketing campaign, which does not take much of your time.

Another example of a passive type of income would be renting property. To do that, obviously, you need to own a property, and to own a property, you need to invest money. Once you fit these requirements and the property has been rented, the money starts coming in. 

There is some level of management involved when you own property, but again, this represents little of your time. 

Other examples include affiliate marketing, starting or becoming part owner in a business, buying or creating a website, etc. There is no shortage of things you can do to create passive income streams.

Portfolio income

Ever heard about wealth management? This is what most wealthy families rely on to maintain and grow the riches they have already amassed. 

What they get from wealth management is, more often than not, portfolio income. This type of income comes from financial investments, which can come in a number of shapes and sizes.

There are fixed-income investments, which offer lower returns but are excellent ways to preserve capital. Not to mention, if you have a lot of money, lower returns can still represent a lot of money.

There are also variable income investments such as stocks. With stocks, you may be looking to grow your capital through an increase in the stock price.

But that is not the only thing stocks provide. Some of them pay excellent dividends, which is a regular payment that you receive for being an investor in the company.

Another excellent portfolio income source is real-estate investment trusts (or REITs), which also pay regular dividends at very attractive rates.

Investing your money is a smart move. But it requires some level of knowledge so you do not incur too much risk. Click the link below and find out about safe investments with the best low-risk options.

Things to keep in mind

happy businessman having time with daughter
Diversify your income sources and have time to enjoy your family and loved ones. Source: Freepik.

Whatever forms of income you choose, you need to understand something about money. Although buying a fancy car, home, or watch, or whatever is pretty cool, being rich is not about that.

Being rich means being free to do what you want. Money helps, of course, but more than money, to do what you want, you need time and health.

If you keep spending your money on things, you will never have enough money. You are going to have to work forever because the world is full of things you can buy. 

But you can’t buy time or health. So save the money you make and build your emergency fund (the link below will show you how to do it). Invest your money and make it grow through passive and portfolio income streams.

Find a job that allows you to make good money and work as little as possible. Then spend the time you have with the people you love. In the end, this is all that matters.

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How much money to save for an emergency fund?

Don't get caught in an emergency situation with no savings to overcome it. Make your emergency fund with the help of these useful tips you'll find in this blog post.

About the author  /  Danilo Pereira

Danilo is a copywriter with a passion for learning. Deeply interested in philosophy, politics and arts.

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