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 :)