3 Types of Income

I think it’s safe to say that most of us like to make money.  Who wouldn’t?  The more money we make, the closer we are to achieving our financial goals, provided we save it.

So clearly, as we’ve explored here, income is important.  From paying bills, to building an emergency fund, all the way to saving for retirement, we need income.  The thing is, I think many people pay attention to only type of income, while not thinking of the others.  Let’s explore three types of income here:

Income from Work

One can call this job income, salary income, or perhaps more broadly – earned income.   Regardless, this is money that you are actively working for.

This income is easiest to obtain when we’re younger.  Frankly, when I was younger, it was really the only income I thought about.  It was all about finding a job, and making money.  Naturally, this is the path most people end up taking, even though some may have trouble finding work in this economy.

Anyway, this doesn’t have to come from a job.  It can also come from being self-employed or from running a business.  Whatever the case, it’s money that you can earn quite easily, depending on your standards as well as your goals.  If you want to make a minimum or low wage job, you don’t require a whole lot of monetary investment to get these jobs.  If you want a better job – and more importantly, a career – it usually requires an investment of money and time in a college education. In many cases, it might require graduate school as well.

I think that this is the foundation of our finances for most our life, and it’s also the source of other types of income.

Investment Income

This type of income comes from assets that own.  Generally, we have purchased these, or invested in them.  This can include stocks, and capital gains from them.  It can also include money such as interest income on checking accounts – no matter how minuscule!  It could also include real estate income, and other alternative sources.

The thing is, in order to get investment income, we have to make money first, right?  How do you invest in stocks unless you have money to invest?  So we must make money, and then save it.  Once we have saved enough, we can get decent cash flow from investment income.

Passive Income

I think passive income is not as clear cut as many people think.  Just to pick out one example, some folks might call blogging income passive income.  Well, you still have to keep on producing content as well as engage your readers.  If you stop writing, and stop interacting, any income won’t last long.  Bottom line is you have to work for it.

The thing is, I think that income which is passive, or near-passive, really entails very little work.  Maybe this is royalty income, or rent money you earn as a landlord after paying someone else to manage a property.  What it comes down to is this involves making money with little current effort on your part.

The line between passive and investment income might be gray in some cases.  I like the concept of passive income, because who wouldn’t like incoming cash flow with very little effort!  But either way, both investment income and passive income can be really great to have later in life.  If it could help reach the goal of financial freedom, all the better!

Thoughts on all 3 income types

Realistically, we can’t work forever, regardless of the overly optimistic thoughts of too many people.   So we need to first work to earn money, and then make sure we save it.  Then, we can invest this money, earn good rates of return, and grow our nest egg.  Ultimately, such income can provide us with cash flow later in life when working is more difficult or less of an option.  To the extent that we can have passive income, all the better!

I’m still in the working and saving phase :)

Readers, do you ever think about income types, and how it might require earned income to get other income sources?  What income sources do you count on now, and what do you hope to have in the future?

15 thoughts on “3 Types of Income

  1. Edward Antrobus

    Personally, not being physically able to work anymore sounds about as miserable a life as I can imagine. If I’m too infirm to work, I’m probably not well enough to enjoy most of my other hobbies as well.
    I can’t really tell if my unemployment check counts as earned income or passive income. That is my income right now. Hopefully, I’ll be back earning real paychecks next month.

    Reply
    1. Post author

      Edward – good question. I say regardless of actual classification, I like to think of it as earned income. Best of luck with the search, I’ve been there before and know that it can take time.

      Reply
  2. Pauline

    blogging income is definitely not passive, unless you have a fantastic niche site on autopilot. I consider real estate income part passive, part active. I still have to look for tenants, charge rent, fix heaters or have them fixed… but it is very little work for the money.

    Reply
    1. Post author

      Pauline – I suppose that semi-passive income is good to have as well. If you’re not doing a whole lot but able to still rent out a property, that’s a good situation to be in.

      Reply
  3. The First Million is the Hardest

    Right now my income from work totally dominates my investment income and passive income as I assume it does for most people. I’ve been making more of an effort lately to build up the latter two types of income so that one day my work income is just one piece of the pie, not my entire lifeline.

    Reply
  4. John@MoneyPrinciple

    The only truly passive income is that which comes on auto-pilot like a pension or equivalent.

    Blogging is certainly not passive – just the research and writing bit (you need some research even if it is online) takes a lot of time, let alone the comments. It is also very uncertain and subject to Google’s games.

    So earned income, investment income (which we hope to grow soon) and passive income (we already have a little) are indeed the three types.

    Reply
    1. Post author

      John – that auto-pilot income would be nice to have! In the meantime, good to focus on earned income and taking savings and making investments. Oh, I agree on blogging not being passive.

      Reply
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  8. KC @ genxfinance

    That is the problem to some people. They work their butts off just to make more money without having to explore other possibilities, other sources of income. Maybe they don’t want to take the risk, thus, they stay just where they are. Never improving.

    Reply
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