Financial Education

Learn more about the different types of income: the 3 most common!

Do you know you can combine more than one type of income to improve your financial life? So, check out this article to learn about the 3 different types of income!

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by Julia Bermudez

Published on 02/13/2022

Discover everything about the 3 most common types of income

Learn about the 3 types of income to improve your financial life
Learn about the 3 types of income to improve your financial life. Source: Adobe Stock.

Not everyone now there is three types of income. When we think about income, we usually think there is only one way to get it. It is: having a job, working for a company, being a service provider, and receiving a salary. But this is not the only way, just one of the many possibilities. 

In the early years of our adulthood, we have a lot of time and physical energy to work. We can sell our labor force in exchange for the wages. This is great, we generate value. But once you already have some savings from this work, you can put it into others types of income. If you do this, you don’t need to spend so much time directly at work. You can enjoy other things in your life.

Let’s talk more about these possibilities, and you can see which one fits you.

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What is an income and its different types?

Do you know what income is? Source: Pexels.

So an income is money you receive on a regular basis for your work. It can also come through investment, by your labor, or by selling goods and services.

There are two types of income that do not depend directly on your time. You can be doing other things, not related to work, while you are generating income. This will give a new meaning to the relation between time and space.

But nothing comes from nothing. Every type of income needs an investment, if it’s not your time, it will be your money. Commonly, you’ll need an earned income first, and work to get paid. Jut then, you can take some of this earned money to invest in a portfolio income or a passive income. You’ll need the right conditions and knowledge to make this happen.

What are the 3 most common types of income?

A wage is not the only way you can get an income. Source: Adobe Stock.

Learn now the 3 most common types of income and how they work!

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Earned Income

It is the income you receive through direct work. Providing a service where you’re actively doing it, and receiving a paycheck. So you have a direct result of your labor: if you’re doing it, you’re receiving your income. This is the advantage of this type of income, it’s more tangible for most people. It’s easier to understand. Another vantage of the earned income is that you’ll get it faster. Usually, you’re paid weekly or monthly, so you won’t wait too long to see its result.

But, as soon as you stop doing the work, you stop receiving, and this is the drawback. If you can’t provide your service for some reason, you won’t have income. This could happen for a variety of reasons. Either because you’re sick, too old, or even just because you would like to dedicate yourself to personal projects. You may need government aid of social security or the help of family and friends. 

Portfolio Income

Also called “Capital Gains Income”. It’s when you buy an asset and you sell it for a higher price. An asset can be stocks, bonds, goods, or real estate. Your gains will come from the difference between the price you bought it to the price you sell it. This type of income requires that you have a pre-existing money. You´ll have to choose wisely, otherwise, you may lose money instead of gain it. This is how you can receive this income:

  • Receiving royalties from invested properties
  • Selling stocks investments
  • Buying and selling assets that gain value over time

Passive Income

We can all be honest by saying this is the most desired kind of income. Passive income does not depend on your direct labor to be generated. After the initial investment, you will receive income with little to zero of your effort being used towards it. There’s is a maximum of hours you can spend directly on the activity that generates the passive income. By the way, that’s the rule to check if that income is really passive or not for tax collection.

However, this Income will not come easily and not without previous hard work. Above all, Passive Income is about making a clever decision and having the right timing. That requires a lot of study and wisdom. But there is no reason to give up the idea, because everything is learnable, and you are capable of it. Some examples:

  • Rental income
  • Buying dividend-paying stocks
  • Investing in real state
  • Monetizing a website

How is an income calculated?

There are many ways to calculate each type of income, depending on its kind

This is how you can calculate earned income:

  • per hour: this is one of the simple ways to calculate it. For each 1 hour of service provided you’ll receive a certain amount of money. Let’s say you receive $25 per hour of service, and you work 6 hours a day, 5 days a week. To calculate your income you just need to multiply 15 x 6 x the amount of days you have worked (let’s say it was 22 days), and you´ll have the result of $3.300 per month.
  • per service: receiving a fixed amount of money for a task, it doesn’t matter how many hours it will take to be done. For example, a professional wall painter can charge the client the amount of $300 to paint it’s house. He could take 5 hours or 20 hours, the income would be the same. In this case, it is better for the painter to finish the work in the shortest amount of time, to do more jobs and increase the income.

Portfolio and Passive Income are different. The value can fluctuate, changing the results. But they’re not unpredictable.

Let’s say about the Portfolio Income: your gains will be the difference between the price you paid and the price you sell your stocks. When it comes to interest, it may vary a lot throughout the weeks or months, even on the same day. Also, you have short-time investments and long-time investments.

The sagacity of the investor need to be on point to know when and where to put the money. The better you get at making this decision, the better will be your income.

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About the author  /  Julia Bermudez

Julia Bermudez is a writer here on this portal. Since childhood, writing has been a passion, and her curiosity for different subjects led to this profession. Julia has a degree in Cultural Production, and her subjects of most significant interest are health, finances, and self-development.

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