Since childhood, I was advised to study hard, get good grades, go to college and graduate so that I can land myself a job with great benefits. It has been my only concrete financial plan until I had turned 18 when I read a book titled ‘Cashflow Quadrant’ authored by Robert Kiyosaki and was exposed to numerous methods of one could work on to earn money and build wealth.
I became a student of financial matters ever since and have begun to explore as many types of income as I possibly could from books, workshops, online media, and casual chats over coffee. It has led me to build multiple streams of income, instead of relying solely on a single job for income.
From them, I realised that these income can be grouped into 5 categories. They each have their unique attributes, requirements, and usages to build wealth for the long term. Here, I’ll share the 5 different types of income, discuss their pros and cons, and how they can contribute progression towards your financial life.
#1: Active Linear Income
It is income derived from an exchange of physical labour and time with a single paymaster. This type of income is most common for it is the fastest means that one uses to make money as it requires the least time, effort and investments to establish this source of income. Some examples include:
– I’m an employee working for $ xxx per time period (day, week, month, … etc).
– I’m a freelancer who charges a fixed fee of $ xxx per project.
– I own an outlet that earns around $ xxx per time period.
This type of income is good when one is starting off. After all, everyone has bills to pay. With that being said, this income is dependent solely on your own effort physically and thus, may be limiting in terms of growth for all of us possess only one physical body, 24 hours a day, 365 days a year, and can only be at one place at a single period of time. As such, this leads us to explore our next few sources of income.
#2: Active Scalable Income
Likewise, it is also income earned from an exchange of physical labour and time but to a network of paymasters. It involves one having built a system or a team or multiples of the both to increase income exponentially via scale. It includes:
– I earn x% in overriding commission from sales generated from my team.
– I’m a freelancer who earns x% in profit share from my project undertakings.
– I sell my products & services via a network of distributors and retailers.
– I sell digital products to my online community consisting of xxx people.
This type of income is expandable because the amount of clients (network) you serve can increase significantly without you substantially increasing your efforts at work. In other words, a 100% growth in your customer base may bring 100% more income without you increasing your workload by 100%. This is usually the type of income that propels one from earning 4-figures to 5, 6, or, 7-figures per month, hence, raising bigger capital faster for bigger investments.
But, if it is that good, why not more people earn this type of income?
This is because it requires people to invest time, effort, and money to first learn about marketing, branding, leadership, and system building. Upon which, there might be no immediate payoffs after investing into them. For instance, you may have a desire to make millions from pitching your products & services to a large audience in a mega preview event. The money sounds enticing. But, you would need to first master effective public speaking and marketing.
‘Who has time to learn about these stuff? I’m tied up with work, you know?’
Regrettably, this is often a reason why many people fail to progress into making active scalable income from active linear income. So, if your income is currently solely derived from active linear income, perhaps, you can consider picking one or two skills which allow you to earn active scalable income. It would be a great investment.
#3: Passive Income
It is recurring income derived from ownership of profitable assets. It includes:
– Interest income from fixed deposit, P2P lending, and other forms of lending.
– Coupons from bonds.
– Dividend income from a portfolio of stocks that pay dividends.
– Rental income from tenanted properties.
– Royalty income from intellectual properties.
– Passive income from owning businesses that you don’t physically manage.
This type of income is awesome because cash is flowing into your bank account without physical labour. In essence, earning passive income is earning time as it frees you time to pursue what you like and feel is important to you other than a job or a project. Besides, there are many tax benefits to be utilised from for you if you have any of the above sources of passive income. Suffice to say, if you are earning $ 100,000 in active income, you will be paying more income tax on this type of income as compared to another person who earns $ 100,000 in passive income. He may even pay literally zero in income taxes from them.
With that being said, the financial intelligence required to make passive income is more than active income. It is inevitable that one has to learn about investing first before earning passive income from it. Therefore, although passive income can be earned without physical labour, this type of income may require a lot of study (mental labour) before being good at it.
#4: Portfolio Income
It is income derived from market value appreciation of your assets, also known as capital gain. Alternatively, this income can be earned via investing into assets at prices below their market valuation. Some examples include:
– My stock has appreciated from $1.00 to $2.00 in x period of time.
– I bought a property for $80,000. Now, it is worth $100,000.
– The value of my property is $100,000. I bought it for $80,000.
Many people find investing appealing and get themselves into it because of the prospects of earning portfolio income or capital gains. It is even more attractive as compared to earning passive income for the money is bigger. After all, eating steak immediately is more appealing than having milk everyday.
I find there are two types of people who want to earn portfolio income.
First, it is people who are focused on money. They intend to make more money via selling assets at higher prices than their cost of purchasing them. This group of people are either traders if they can make money consistently or speculators and gamblers if they lose money consistently from their activities.
Second, it is people who are focused on accumulating assets. They are not ones who will kill their golden goose as they treasure them. For instance, they would invest in a stock or properties and hold onto them for long-term capital growth. Their mindset is to keep them and not sell them for a profit. In most cases, they would build massive net worth from their investments over time.
#5: Phantom Income
It is income derived through the leverage of tax benefits, corporate entities and debt. It is known as Phantom Income as the income is not receivable via cash. It is an income of the rich as it requires a higher degree of financial intelligence to fully grasp the concept and utilise it. I have written an article lately to introduce and illustrate one of the many types of Phantom Income.
I won’t list down its examples for its explanation is more technical. Here, suffice to say, the best way to use this income efficiently is to surround yourself with a team of advisors such as investors, businessmen, accountants, lawyers, bankers and other related financial professionals.
There you go, the 5 different types of income that one could earn for himself to increase financial wealth.
If you think about it, the 5 types of income is actually an income progression of most wealthy people who began with very little. For instance, they would begin with earning active linear income first to survive, expand their income through scale, invest their capital for passive income and portfolio income and roped in a team of advisors to make phantom income by setting up corporations to save on tax payments and use low interest rate debt to accumulate more investment assets that would build more wealth into the future.