How to make more money: the different types of income
Wondering how to make more money? Check out this post for an introduction to the different types of income and their benefits and drawbacks!
Diversifying your income is crucial to financial success
Would you like to make more money? Are you always looking for ways to bring in extra income? If so, you’re in luck. There are different types of income that you can generate.
This blog post will discuss the three income types and tips to increase your earnings. So let’s get started.
Why is it essential to have more than one type of income?
Most people initially think there’s just one way to earn income, the one related to their jobs. Nevertheless, there are many ways to make money; some may work better than others.
Having more than one type of income is essential for financial stability. When you have only one source, it can be difficult or even impossible to maintain your standard of living in the long term.
If you’re looking for alternative ways to earn money, then understanding the pros and cons and what kind of income you can potentially make will help you grow your net worth in time.
The 3 types of income: Earned, Passive and Investment
You must be aware of three common types of income: earned income, passive income, and investment income.
Below, we’ll fill you in on the definitions, advantages, and disadvantages of each one.
Also known as active income, this is the most common one. Earned income is related to every amount of money you receive for any work you have done.
So your income is earned if you receive a salary or wages, get tips or bonuses, whether you work for a company or are self-employed.
The main characteristic of this type of income is that you’re exchanging time, energy, or knowledge for money.
Earned income is a constant and safer way to make money since you’ll perform a job and receive the worked hours daily, weekly, or monthly.
Also, this type of income can be earned in different sectors since jobs exist in multiple areas.
In addition, there are ways to increase your earnings. You can get a raise, for example, if you perform well.
If you’re starting your financial independence process, earning income is a solid way to build it.
Although the easiest way to guarantee earnings, this income is usually just enough to make a living and pay basic costs.
It will potentially require much of your time since you must work to receive money. And when your current amount isn’t enough, it will need extra hours, such as part-time jobs.
In addition, earned income is subject to the highest taxation rates. Meaning that the more you work and earn, the more the government takes away from you.
Simply put, passive earning comes from assets you’ve put your money into or worked on before. This type of income will continue to generate cash if you decide to stop working.
It doesn’t require your involvement in day-to-day operations or decisions. You just let things happen with a little input on behalf of yourself.
Passive Income includes activities such as royalty payments, rental, investment, or business partnerships.
One of the main advantages of passive income is that you can make extra money without continuously for it. Also, whether you’re working or not, it will continue to produce cash flow.
Another pro of this type of income is that you won’t be exchanging time for money anymore. Therefore, you’ll have more control of your time.
Passive income can also pay lower taxes to the government. So it is a great way to make extra cash, right?
Passive income is an excellent way to make more money. However, it will require considerable financial, time, and energy investment.
So you must be patient since this strategy requires some time before any return on your efforts.
Last but not least, we have investment income. This one is generated when you sell something for a higher price than you bought it and gained a capital gain.
So it refers to financial gains exceeding an investment’s original cost. For example, if you bought a stock for $300 and sold it when it’s worth $600, you’ve made $300 as a capital gain.
This income is an excellent opportunity to grow your wealth outside your earned income. It won’t require much work, such as other kinds of income.
Moreover, taxes are lower for capital gains. So with optimized taxes, you’ll get to save more of your money.
Unlike the other types of income, investment income might involve more risks. The country’s economy, for instance, has an extraordinary impact on it.
Investment income also requires knowledge. Before investing, you’ll need to know where your money is going, so you need to do some research.
Lastly, this type of income usually requires quite an investment. If you want to make significant gains, it will take some money on your part.
Now that you’ve learned about the types of income, it can be of good use to learn how to start budgeting. So, check out our post below to learn all about it!
About the author / Beatriz Vieira
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