Types of Income

To be able to understand the concept of investment and money saving, it is important to understand different sources of money, i.e. where is your income coming from, how much of it are you spending, hence how much disposable income do you have, etc. So, lets start with the basics and understand why income diversification, and investment diversification is necessary.

So, lets categorize common sources of income:

1. Earned Income: This income is what you earn in your job in the form of paycheck. Its related to the time you out in your work, so, if you stop working, you don’t make any money. It’s the most common type of income. Some examples are:

• Job paycheck
• Owning a small business (unless you are a dormant partner and have employees who can take care of it in your absence)
• Consulting
• Any other job/ activity that pays you based on your time input

2. Passive/ Residual Income: This kind of income that comes in without you having to be actively involved. They are forms of income that you work for initially, but once you’re set, you can reap benefits for a long time. Some examples are:

• Royalty from authoring a book
• Royalty from an invention
• Rental income from investment porperties

3. Portfolio Income: Income derived from holding a paper assets, like:

• stock portfolio, bonds or mutual dividends from stock or mutual funds, etc. This is probably the most common form of investment income, it is easy to manage, but very volatile. Also, you don’t have much control over your asset values.
• A new investment that folks are looking into is REIT – Real Estate Investment Trust, which is an investment in real estate, but without the headache of managing a property. I will discuss REITs it in later posts.

It is very important to diversify your investments, and your income. If you depend on just one type of income, say a paycheck, you lose everything if you lose your job. Or if you put all your savings and money to buy stock, you could lose thousands if the stock value goes down. Although this blog encourages increasing and retaining passive income through real estate, please remember, you should be money smart and not put all your eggs in one basket.