As you get older, you will see that there are different types of money. They are good for you. They help you live better, have more worth, and have less stress.
But, for most of us, the only income we are aware of is the one related to our future job.
That money you earn from work is very important. That’s how you get food and other things. But it’s not the only way to make money. When I learned about personal finance, I realized that mastering different types of income will help me in my life.
A lot of people want to have financial stability. You can do this by working and making money. If you want financial independence, then you will need to work hard and earn money from multiple sources.
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Why Do Different Types of Income Matter?
Many options exist to earn money. It is important to know the difference between them. That way, you can make more money and reach your goals faster.
Different types of income have different amounts of work. Some are harder than others. But some are done once and the money comes back to you later.
You will keep more of your money if you use some types of income and not others. By using them, you can earn more and reach your goals.
In addition, one stream of income can disappear. This may be stressful. But you can now have other ways to make money that will not be as stressful.
It is important to have different ways of earning money. I will tell you about three kinds of income and some other kinds too.-
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Lists Of Three Common Types of Income
There are three types of income that you should know about. Earned income is when you work for money. Passive income is when money comes to you without working. Capital gains, which are like earned income, come from investments like stocks and real estate.
#1 Earned Income
Earned income is the money you get from your job. It includes the money you make by working for a company at a fixed rate every month.
Examples of earned income are:
- The hourly wage at a corporation
- Part-time or full-time employment
- Being a salaried employee
- Client/business consulting
Advantages Of Earned Income
People usually get paid for earned income on a recurring basis like weekly, bi-weekly, or at the end of the month. This is good because you can get started easily and earn money quickly. If you have different sets of skills, there are jobs for them.
Plus, you don’t have to pay for a job hunt. And it is less risky than other types of income.
Disadvantages Of Earned Income
Earned income is money you get from working. You need to work a lot of hours for this money.
This means that you spend a lot of time commuting to work. You will have to work more hours too. Earned income has one of the highest tax rates when compared with other types of income.
Additional disadvantages include:
- Job loss means loss of revenue.
- You may despise your job or employer.
- Become a machine cog
#2 Passive Income
Passive income is money you get from assets that you put effort into. This is something you did work on and are now reaping the benefits.
- Buying and renting a home
- Stocks that pay regular dividends
- Website or blog affiliate marketing
- A REIT is an investment trust.
- Masterworks or Fundraise Crowdfunding
Advantages Of Passive Income
Passive income means you will not work for money. You make money when you sleep. If you control the investment, it will have a better chance of being successful.
One other advantage of passive investments is that they have lower taxes. You can also borrow money to help you start a business – for example, if you need a mortgage for a house or if you want to invest in another company.
Disadvantages Of Passive Income
The disadvantage of this way to make money is that you have to put in a lot of work at first. You might not always get paid, but if you do it will be a lot of money.
When you invest in a company, you might need to pay a large amount of money at the beginning. You will also need to learn some skills in order to make the most of your investment.
#3 Capital Gains Income
Sometimes people get money when they sell something for more than they bought it for. This is called capital gains.
Capital gains income is called that because you pay tax on the profit you make. It is when you sell something for more than what you paid for it.
- Investing in stocks, bonds, and funds
- Real estate transactions
- Buying and selling collectables and precious metals
There are differences between short-term & long-term capital gains income. The short term is selling stocks after you buy them and the long term is when you sell assets like real estate.
For example, you might have invested in a different type of fund. Let’s say you bought one for $500. Later, it is worth $1,000. If you sell it then you will make money because the price went up to $1,000.
Advantages Of Capital Gains
The main benefit of capital gains income is that you do not need to work as hard. If you buy stocks and sell them later, you will get money without having to do much. You might also benefit from holding onto your stocks until the price is higher than selling them.
One benefit of this type of income is that capital gains taxes are lower than income taxes. This means you will be able to keep more money.
Disadvantages Of Capital Gains
Capital gains income has both advantages and disadvantages. The advantage is that you don’t need to know much, but the disadvantage is that it takes knowledge.
Investing in stocks and bonds is about knowing which companies you invest in. You need to research the company you choose before you invest.
If you want to buy a house, then you need to be able to get a mortgage and have the time and resources for researching properties.
Sometimes, when you have assets, you don’t have a lot of control. You can only buy and sell them. It is difficult to make a lot of money with this type of investment. You need to put in lots of money.
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There are Also Other Types of Income
There are three types of income. The first two are the common ones. There is a third one that you should know about, too.
#1 Rental Income
Passive income is money that you earn without doing any work. This fits into this category, but I will talk about it more.
Many people need to rent a house. There are not enough houses for everyone who needs one. Buying and renting out is a way to make money and have a place to live.
You need to do research before you can decide what types of properties to buy and sell.
If you need to take out a mortgage for your house, you will need to work with the bank so that the amount of money you receive from renting your house is enough for how much it costs.
Advantages of Rental Income
When renting out your home, you can make money every month. The money goes into one account and you can pay bills with it.
If you rent your property for a long time, not only will you get money, but the price of your house will also go up.
As a landlord, you will be able to claim certain tax benefits. You can also deduct certain property management costs, insurance and other depreciation costs from your profit.
Disadvantages of Rental Income
When you own an apartment, you are responsible for your renters if something happens to the apartment. If it gets flooded or noisy, you will have to fix it.
It is important to hire a property manager, but you do not want them to be in control. You need to make sure that they are not going to take more money from you than they should.
Managing a property can be hard. You might need to evict people or take them to court, but you should know what you are doing.
The downside is that you will need to make a lot of money before investing in rental properties.
This can take a lot of money. It’s not very diversified, so if something happens to the house or the neighborhood, your money is gone.
#2 Inherited Income
Inherited income is money that you would get from someone who died or set up a trust for you. You will get money after the person dies.
You would get your money or homes through something. You might also get it through stocks.
Once the family members die, you will go through an estate planning process that includes writing wills and paying inheritance tax.
But there are many cases of family money that are passed down from generation to generation. Many families in the world have a lot of money. They get it from things like cash, assets, and business ventures.
The advantages of inheriting money are that you get a lot of money. The disadvantages are that you don’t have to do much work. You can be part of a wealthy family and inherit the money, but if you want to be rich, work hard.
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People Also Ask
What are the 2 types of income?
There are two types of income. One is active, and the other is passive. Your business probably uses an active income stream. This is when you work or provide a service, and someone pays you for it.
What salary is considered rich?
A $500,000+ income is considered wealthy. In 2021, any household that makes over $470,000 a year is considered as the top 1% earner.
What is an income formula?
You can find the cost of goods sold in a simple guide. It is also called net income. The formula is Gross Income- Expenses= Net Income. Or: Total Revenues- Total Expenses= Net Income.
How is income calculated?
First, multiply your hourly wage by the number of hours you work a week, and then multiply that number by 52 to find the total amount in a year. Now divide this total by 12 to find your monthly income.
What is an annual income?
Annual income is money you make each year. You get this money even if deductions are taken out. For example, if you are paid $75,000 a year, your annual income will still be $75,000.