Financial literacy Archives

Income is the amount of money that a person or a business receives in exchange for providing a good or a service, or through investing capital. Income is used to fund day-to-day expenditures, as well as to save and invest for the future. However, not all income is the same. There are different kinds of income, depending on the source, the nature, and the taxation of the income. Here are some of the main types of income:

Earned Income

Earned income is the income that a person receives from working, either as an employee or as a self-employed individual. Examples of earned income include wages, salaries, tips, commissions, and business income. Earned income is usually the main source of income for most people, and it is subject to income tax and payroll tax (such as Social Security and Medicare tax) in most countries. This is often the kind of income that requires the most effort, but is also able to provide a bigger amount of earnings.

Passive Income

Passive income is the income that a person receives from sources that do not require active involvement or participation. Examples of passive income include interest, dividends, royalties, rent, capital gains, and income from certain businesses that do not require the owner’s direct involvement. Passive income is often considered a desirable source of income, as it can provide a steady and consistent cash flow without much effort or time. However, passive income is also subject to income tax, and sometimes at a higher rate than earned income. Passive income is also hard to build as it entails acquiring capital first. Earnings are also usually affected by how much capital is invested.

Portfolio Income

Portfolio income is a subset of passive income that a person receives from investing in financial assets, such as stocks, bonds, mutual funds, exchange-traded funds, and derivatives. Portfolio income mainly consists of interest, dividends, and capital gains. Portfolio income can provide a source of income that is independent of the performance of the economy or the labor market, and it can also offer diversification and risk reduction benefits. However, portfolio income can also be volatile and unpredictable, depending on the fluctuations of the financial markets. Moreover, portfolio income is subject to income tax, and sometimes to additional taxes, such as capital gains tax and dividend tax.

Residual Income

Residual income is another subset of passive income that a person receives from creating or owning something that continues to generate income after the initial work or investment is done. Examples of residual income include royalties from books, music, or patents, income from licensing a brand or a franchise, and income from network marketing or affiliate marketing. Residual income can provide a source of income that is scalable and sustainable, as it can grow over time and does not depend on the amount of work or input. However, residual income can also be challenging and competitive to create and maintain, as it requires creativity, innovation, and marketing skills. Furthermore, residual income is subject to income tax, and sometimes to additional taxes, such as self-employment tax.

Other Income

Other income is any income that does not fall into the above categories, or that is not derived from a regular or predictable source. Examples of other income include settlements, awards, bonuses, and others. Other income can provide a source of income that is unexpected and additional, as it can supplement the existing sources of income. However, other income can also be irregular and unreliable, as it can vary in frequency and amount. Additionally, other income is subject to income tax, and sometimes to additional taxes, such as gift tax and estate tax.

The Recommended Strategy

Earning from multiple income streams is important to help you achieve financial freedom. Ultimately you need to understand that different stages of your life will call for receiving more of a certain kind of income. For young people, earned income usually helps you build your wealth the fastest as you can make the most out of skills you learn. As you grow older, more and more of your income should come from more passive sources to ensure that you’ll fare well into your retirement years.

The Benefits

Financial security: If one of your income sources is affected by a crisis, a market downturn, or a personal setback, you can still have other sources to fall back on and maintain your lifestyle. Having multiple income streams can also help you save more, invest more, and achieve your financial goals faster.

Diversification: Having multiple income streams can help you diversify your portfolio and reduce your exposure to any single industry, sector, or asset class. This can help you mitigate risk and take advantage of opportunities in different markets.

Flexibility: Having multiple income streams can give you more flexibility and control over your time, energy, and resources. You can choose to work on the projects that interest you, pursue your passions, and balance your personal and professional life. You can also adjust your income streams according to your changing needs and preferences.

Growth: Having multiple income streams can help you grow your skills, knowledge, and network. You can learn new things, explore new fields, and meet new people. You can also leverage your existing skills and assets to create new income streams or scale up your current ones.

How to Create Multiple Income Streams

Creating multiple income streams may seem daunting, but it is not impossible. Here are some steps you can take to get started:

Assess your current situation

Before you create multiple income streams, you need to have a clear picture of your current financial situation, such as your income, expenses, assets, liabilities, and net worth. You also need to identify your financial goals, such as how much income you want to generate, how much risk you are willing to take, and how much time and effort you are willing to invest.

Identify your strengths and opportunities

Next, you need to identify your strengths and opportunities, such as your skills, talents, passions, hobbies, interests, experiences, and network. You can use these to create value for others and generate income. You can also look for gaps in the market, problems that need solutions, or trends that you can capitalize on.

Research and validate your ideas

Once you have some ideas for potential income streams, you need to research and validate them. You can do this by conducting market research, analyzing the competition, testing your product or service, and getting feedback from your target audience. You can also use tools such as Google Trends, Keyword Planner, and Social Media Analytics to gauge the demand and potential of your ideas.

Launch and scale your income streams

Finally, you need to launch and scale your income streams. You can do this by creating a business plan, setting up a legal structure, registering your business name and domain, creating a website and social media accounts, and marketing your product or service. You can also use platforms such as Shopify, Etsy, Udemy, Fiverr, and Medium to sell your products or services online. You can also collaborate with other entrepreneurs, influencers, or affiliates to expand your reach and grow your income.