Everyone always associates income with the hard-earned cash from working that 9-5 job but there are two other forms of income that you can earn without really consuming your time. If you combine these three forms, you have the potential to set yourself up for financial freedom. Now what are these types of income called? Active income, passive income, and portfolio income. Here is the key to living a financially confident life.
Active income is pretty simple, think of it as your earned income. This comes from your paycheck that you work long hours for. Active income is the most common and familiar type because almost everyone works, and they all receive some form of income (money) for their sacrificed time. This type of income is great because it can possibly supply a steady flow of money. If you work 6 hours, you are guaranteed 6 hours worth of pay.
This is the easiest form of income to make because one, you are paid hourly, salary, or through commission and two, it does not require an input of money to start working unless you are forming your own business. Most individuals start out working for someone else because it is free to begin a new job. This definitely sounds great, but there are some cons as well.
Although you can increase your income by taking a higher paying job or working more hours, it is difficult to achieve a maximum income that can earn you the most amount possible because time and salaries are limited. There is only so many hours you can work in a day and only so much an employer is willing to pay.
Passive income may be an optimal form of income that can allow you to generate money without putting in much work. Doesn’t that sound great? Essentially, passive income is money earned from investment assets that you developed or bought. Let’s look at some examples: owning a business, investment properties, E-Commerce. Although there is some work involved, it is mostly hands off. Once you created the product, handle the tenants, or anything else you are planning on selling, these entities may generate money. Initially, while you are forming this side business, you will still need earned income and possibly access to savings or a line of credit to sustain you until the passive asset is established.
The biggest difference between active income and passive income is that passive income has the potential to “out-earn” your active income. Passive income can grow and begin earning more than you could ever make from working your salary-based job. It’s also important to remember upfront and ongoing expenses (e.g. maintenance and repairs, “bad” tenants, property taxes, unsold inventory, storage fees, etc.) should also be carefully considered and budgeted for prior to committing to any sort of business opportunity. You will need to put some time and money into the asset at first, but once it is established, it has the potential to generate more money than you could earn from active income.
Portfolio income can be fantastic but is not guaranteed. This type of income refers to any capital gains earned through selling or having assets. So what does this mean? Let’s say you purchase a stock for $5 and sell it for $50. You earned $45 in capital gains from selling the stock, which is money in your pocket hence, income. In order to partake in portfolio income you must invest an initial principal amount and there is potential to gain or lose depending on how the investment asset does. Here is the risky part: you could lose your principal amount. With that being said, you have the potential to earn money as well.
The other aspect of portfolio income is earning money by simply having assets. How do you make money here you ask? Dividends and interest are ways to earn money on your assets without selling them for profit. Some stock categories have the option to earn dividends, money paid to shareholders regularly from company’s profits. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. You can earn interest on certain investment options which essentially is a payment to you for allowing someone, or a bank, to borrow your money. Fixed income assets, such as bonds, are subject to market and interest rates rises and bonds are subject to availability and change in price.
Dipping into all three forms of income can generate the most amount of money possible with two forms involving little to no work. Of course, all investing involves risk, including the potential loss of principal. How awesome does that sound? If you are smart about your money and establish a plan for your passive and portfolio incomes strategically, you could potentially earn enough consistently to quit your active income job. Planning out your forms of income can eventually have your money work for you instead of the other way around.
Staying knowledgeable of all the ways you can earn extra money through passive and portfolio has the potential to allow you to live a worry-free financial lifestyle.