The Three Types of Income

When you

get right down to it, there are three broad types of income you can generate:

  1. Earned Income
  2. Portfolio Income
  3. Passive Income

Earned Income

Earned income is any income that is generated by working. Your salary or money made from hourly employment (regardless of whether that salary or hourly income came from working for someone else or from your own “consulting”) is considered earned income.

Some activities that generate earned income include:

  • Working a job
  • Owning a small business
  • Consulting
  • Gambling
  • Any other activity that pays based on time/effort spent

 

Portfolio Income

 

Portfolio income is any income generated by selling an investment at a higher price than you paid for it. Some people refer to portfolio income as “capital gains,” because that’s how the money is taxed by the federal government.

Some activities that generate portfolio income include:

  • Trading (buying/selling) Paper Assets — Paper assets refer to things like stocks, bonds, mutual funds, ETFs, CDs, T-bills, currencies or other types of futures/derivatives. Stock market investing is the most common generator of portfolio income
  • Buying and Selling Real Estate (specifically the profit from the sale)
  • Buying and Selling of any other Assets — Antiques or cars, for example, or other types of collectibles that have appreciated in value

Passive Income

Passive income is money you get from assets you have purchased or created. For example, if you were to buy a house and rent it out for more money than it costs you to pay your mortgage and other expenses, the profit you make would be considered passive income. As another example, if you owned a business that could operate independently of your working for it, any money that you make from the business would be considered passive income (of course, if the businesses success was limited by the number of hours you worked, the income you made would be considered “earned income”).

Some activities that generate passive income include:

  • Rental Income from Real Estate
  • Business Income (assuming it’s not earned based on amount of time/effort spent — that would be Earned Income)
  • Creating and Selling Intellectual Property — Books, Patents, Internet Content, etc
  • Affiliate or Multi-Level Marketing

Source: http://www.threetypes.com/philosophy/income-types.shtml

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