Since childhood, parents advise us to study hard, get good grades, go to college and graduate so that we can land a job with great benefits. It has been our only concrete financial plan until we faced the reality of adulthood. here are many types of income which easy.
We became students of financial matters ever since and have begun to explore many types of income from books, workshops, online media, and casual chats over coffee. It has led us to build multiple streams of income, instead of relying solely on a single job for pay.
In this article, let’s explore these income types. Each has its unique attributes, requirements, and usages to build wealth for the long term. We’ll examine five different types of income, discuss their pros and cons, and how they can contribute progression towards your financial life.
1. Active Linear Income
It is income derived from an exchange of physical labour and time with a single paymaster. This type of income is most common for it is the fastest means that one uses to make money as it requires the least time, effort and investments to establish this source of income.
For instance:
- You are an employee working for $ xxx per period (hour, day, week, month, shift, etc.).
- You are a freelancer who charges a fixed fee of $ xxx per project.
This type of income is useful when one is starting off. After all, everyone has bills to pay. With that being said, this income is dependent solely on your effort physically.
So, it may be limiting in terms of growth for all of us possess only one physical body, 24 hours a day, 365 days a year, and can only be at one place at a time. As such, this leads us to explore our next few sources of income.
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2. Active Scalable Income
Likewise, it is also income earned from an exchange of physical labour and time but to a network of paymasters. It involves one having built a system or a team or multiples of both to increase income exponentially via scale.
It includes:
- You earn x% in overriding commission from sales generated from your sales team.
- You are a freelancer who makes x% profit share from project undertakings.
- You sell products or services via a network of distributors and retailers.
- You sell digital products to an online community consisting of xxx people.
This type of income is expandable because the number of clients you serve can increase significantly without you substantially increasing your efforts at work. In other words, a 100% growth in your customer base may bring 100% more income without you increasing your workload by 100%.
This is usually the type of income that propels one from earning 4-figures to 5, 6, or, 7-figures per month, hence, raising more significant capital faster for investments.
But, if it is that good, why not more people earn this type of income?
This is because it requires people to invest time, effort, and money to first learn about marketing, branding, leadership, and system building. Upon which, there might be no immediate payoffs.
For instance, you may have a desire to make millions from pitching your products to a broad audience in a mega preview event. The money sounds enticing. But, you would need first to master effective public speaking and closing.
3. Passive Income
It is recurring income derived from ownership of profitable assets. It includes:
- Interest income from fixed deposits, P2P lending, and other forms of credits.
- Coupons from bonds.
- Dividend income from a portfolio of stocks that pay dividends.
- Rental income from tenanted properties.
- Royalty income from intellectual properties.
- Passive income from owning businesses that you don’t physically manage.
This type of income is awesome because cash is flowing into your bank account without physical labour. In essence, receiving passive income is earning time as it frees your time to pursue what you like. Besides, there are many tax benefits if you have any of the above sources of passive income.
If you are earning $ 100,000 in active income, you will be paying more income tax on as compared to another person who makes $ 100,000 in passive income. He may even pay literally zero in income taxes in Malaysia.
However, you need higher financial intelligence to create passive income effectively. One inevitably has to learn about investing and be a skillful investor with a great temperament.
Therefore, although passive income doesn’t require much physical labour, you need to study a lot (mental labour) before being good at it. Besides, without huge capital, you can’t survive on meagre passive income to do it fulltime.
4. Portfolio Income
It is income derived from market value appreciation of your assets, also known as a capital gain. Alternatively, you can earn this profit via investing in assets at prices below their market valuation. Some examples include:
- Your stock has appreciated from $1.00 to $2.00 in x period of time.
- You bought a property for $80,000. Now, it is worth $100,000.
- The value of your home is $200,000. You bought it for $80,000 7 years ago.
Many people find investing appealing because of the prospects of earning portfolio income or capital gains. It is even more attractive as compared to making passive income for the money is more significant. After all, eating steak immediately is more appealing than having milk every day.
I find there are two types of people who want to earn portfolio income.
First, it is people who are focused on money. They intend to make more money via selling assets at higher prices than their cost of purchasing them. This group of people are either traders if they can make money consistently or speculators and gamblers if they lose money consistently from their activities.
Second, it is people who are focused on accumulating assets. They are not ones who will kill their golden goose as they treasure them. For instance, they would invest in stocks or properties and hold onto them for long-term capital growth. Their mindset is to keep them and not sell them for a profit. In most cases, they would build massive net worth from their investments over time.
5. Phantom Income
It is income derived through the leverage of tax benefits, corporate entities and debt. It is known as Phantom Income as the income is not receivable via cash. It is an income of the rich as it requires a higher degree of financial intelligence to grasp the concept and utilise it fully.
We won’t list down its examples for its explanation is more technical. Here, suffice to say, the best way to use this income efficiently is to surround yourself with a team of advisors such as investors, consultants, accountants, lawyers, bankers and other related professionals.
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Conclusion
There you go, the five different types of income that one could earn for himself to increase financial wealth.
If you think about it, the five types of income is an income progression of most wealthy people who began with very little. You would begin with earning active linear income first to survive, expand your income through scale, invest your capital for passive income and portfolio income and roped in a team of advisors to make phantom income by setting up corporations to save on tax payments and use low interest rate debt to accumulate more assets that would build even more wealth.
Now you know how it works. Go work on it!
This article is co-written by KCLau and Ian Tai
Ian Tai is the founder of DividendVault.com, a platform that analyse and filter stocks that pay increasing dividends year after year.
KCLau is a financial educator. He had published 6 books and co-created a dozen online financial courses. After conducting more than 461 hours of free webinar and 2000 articles published online, he gives away his popular Money Tips e-book volumes absolutely free at his website: https://KCLau.com
