3 Kinds Of Income And Why You Should Have All Of Them

Money. Photographer: Trevor Snapp/Bloomberg

Having one source of income is like having all your eggs in one basket. Sooner or later, it’s going to cave under pressure right before your eyes. It’s easy to feel like you have made it once you start earning a salary. However, this isn’t enough. The most important lesson to learn in financial education is the value of cash flow. Here are types of income and why you should have all of them.

  1. Passive Income 

This is the kind that you earn on the side whether or not you intended on earning from it. For instance, when you rent an extra room in your house, this counts as passive income. Check out  Top 5 Small Business Ideas To Make Passive Income. There are a number of ways you can generate it without much effort. Its main characteristic is that it’s not earned on the basis of time and effort. In other words, this is your side hustle.

It’s said to be the most attractive form of income and the key to financial freedom. More people are coming to this realization and starting their own side hustles. Passive income is necessary as it puts money in your pocket whether you have a job or not. This ensures that you won’t lack some fallback money even when times are rough. Additionally, making your assets work for you is always a plus.

  1. Active Income

As some put it, this is the money you earn to give up on your dreams. It comes in the form of a monthly salary, wages and/or bonuses. The perception was that this is the most important type of earning but this couldn’t be further from the truth. Active income is good as it offers financial security. However, if you seek to become wealthy, you have the least chance of doing so with an active income alone. 

Since it’s the most taxed type of income, you’re basically working to pay taxes. Additionally, the higher you earn, the more taxes you pay. So, there’s no way around it. Not to mention, the time you spend making this kind of money is limited. Therefore, there’s a cap on your income which is out of your control. 

However, it’s not all bad news for these earners. This is not only the easiest type of income to make but also the most steady. You have an assurance of a decent amount of money as long as you have a job.

Money. Photographer: Trevor Snapp/Bloomberg
  1. Investment Income

Last but not least, this is the kind you earn through making investments. It is the most overlooked but it’s one of the best ways to become wealthy. Most of the world’s richest people generate wealth through this method whether it’s by trading stocks, business, real estate or valuables. Want to be wealthy? Investment tips 101

Investment income should be one of your sources of income as it creates income on a consistent basis for you even while you sleep. All you need to do is make good investments and wait for your returns. However, the reason most people shy away from it is that it requires you to put up a significant amount of money so that you can enjoy good returns. You also need to do your research and be well- acquainted with the stock market before investing.

It requires some level of expertise that many people don’t possess. However, if you’re interested in investing, you can approach investment firms who will advise you on how to do it.

Each of these has its merits and demerits. That is why you need all of them to complement each other and bring you closer to your financial goals.

Here are tips on How to create a Financial Plan as well us How To Do A Personal Financial Check

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