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8 Types Of Income You Should Know

Written by Millennial In debt on August 22, 2021

The average millionaire has seven streams of income. Seven! And since I habitually call you a future millionaire, I found it was only right to break down the 8 types of income you should know about and potentially partake in.

Why Multiple Streams Of Income ?

Well if the last 18 months has taught us anything, your employer is not as financially as you thought, and they are often one to two months away from going under themselves. Relying on one source of income (usually earned income - but we'll get there in a moment), has always been risky. Now more than ever, it is even riskier. If that singular source of income were to abruptly come to an end, it would make life extremely difficult to keep up with.

It is crucial to secure at least two sources of income to help alleviate the possible stress and anxiety of being without a source of income completely. MY hope for you by the end of this post- is that you have figured out at least one more source of income that you would like to secure over the next few months. So let's dive in shall we!

8 types of income
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8 Types Of Income You Should Know

1. Earned Income

I figured I'd get the most commonly spoken about/ known source of income you should know out of the way. Earned income is the income you earn from your regular 9-5. The weekly or bi weekly checks you receive are your earned income. The majority of the time, your earned income is also your main source of cash flow that sustains the bulk of your day to day living. It is traditionally the source of income intertwined with health insurance, and retirement funding.

PROS: For the most part earned income is "easy" to get started earning. You get a job (which in this market... is no easy feat) based on a certain set of skills you may possess/ excel in. Earned income also does not require any upfront capital invested into the process.

CONS: Just note... that there are no true cons to having multiple streams of income but I like to present the good with the less good so you have a full picture. A major drawback with earned income is that your time is up for grabs by your employer. This isn't a source of income that you can set and forget. You have to actively be a part of the process in order to make any money. Earned income tends to be taxed a bit higher than other sources of income. And of course if you lose your job, then that source of income dries up immediately.

2. Capital Gains

This source of income is fascinating to me, because much like compound interest, capital gains can be your best friend or your worst enemy. Capital gains as a source of income is definitely going to be your best friend! The basis of capital gains income is selling something at a higher price than you bought it for. This source of income is mostly aligned with buying and selling stocks, real estate, or a valuable commodity (like gold). Capital gains income only comes to play when you sell the asset you are holding on to.

PROS: Capital gains income requires very little work and very little time. Another benefit of capital gains income is if you buy and sell correctly you are in a prime position to pay less taxes on your gains. Keeping more of my money is always a pro to me !

CONS: You don't really have much control over this type of income. Of course its is important to do research on the investments you are making, but all you really can do is buy or sell. You don't control whether the asset increases or decreases in value over time. Opposed to earned income, capital gains income does require you to put money up front in order to earn money back. This money is usually a rather large investment.

3. Royalty Income

Many people confuse royalty income with passive income / residual income - and that's okay let's talk about why. Royalty income does have the propensity to overlap into passive/residual income territory, and they have initially the same startup time requirements overall. Royalty income is when other people pay you to use your ideas, products, or inventions. You get a certain percentage of the money they are making using your creation.

PROS: As the world moves more and more towards technology, there has been a huge increase in the market for ideas and products that can hold royalty rights. This means more and more people in society looking to purchase ideas that are proven to be successful and appealing to the masses. AKA... the world is your royalty income oyster.

CONS: Royalty income is based on something you've created that you are "loaning out" for use by others. This means this is going to take a time (and sometimes) financial investment up front before you can start seeing any money come in. Finding where to put your product to earn this source of income can also be time consuming and difficult to navigate.

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4. Dividend Income

I'm certain you're familiar with this term if you are navigating the stock market world. You can not make dividend income if you are not investing in the market (Investing 101: How To Invest Even When You're In Debt) Dividend income occurs when you buy shares in a company - this makes you part owner- and thus you are entitled to dividend payments. These are often paid out on a monthly, quarterly or annual basis.

PROS: When investing in the market appropriately, dividend income is a great investment strategy with the potential for high returns. It is a definite step towards the right direction when it comes to securing your financial future and gaining financial freedom.

CONS: There are obvious risks and no guarantees when it comes to investing in the market, so this is not a sure fire 100% guaranteed way to make any sort of income on a consistent basis- at least not in the initial stages. This form of income also may be tempting to "invest it all" but remember it is important to have an emergency savings account before you start investing, and that you only invest what you can afford to lose.

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5. Rental Income

This one is easy to understand at its basic principal: you buy property (more commonly known as investment properties) and rent them out. The property can be commercial, residential, or office space. Rental income is another source of income that falls under the "passive income" umbrella because once you've put in the initial hard work, your income source coasts. (theoretically- because I imagine being a landlord can't be all that easy)

PROS: Rental income, similar to earned income can be very stable. It is a recurring income source that you can count on. This type of income is also a useful tool to paying down your mortgage without actually paying down your mortgage. An added benefit to rental income, is your property has the opportunity to grow in value giving you that capital gains income as well! I love the smell of a 2fer don't you!

CONS: Rental income is going to take a huge financial investment at the start. You're going to actually have to purchase the property you plan on renting out. You are also responsible for the property and whomever you choose to rent it to. That means whatever problems the property has... it is up to you to get that fixed. (or property managers if you are able to hire one for your property). Rental income also comes with the fact that your property could lose value.

6. Residual Income

Like with many of the sources of income you should know that I have previously mentioned, some of these fall overlap, with a few distinct differences. Residual income can be a source of "passive income". With residual income, you are continually paid for your service/ product even after you have stopped/ finished doing it. The digital age and rise of technology have made a huge boom in the residual income category.

PROS: After the initial time commitment, you are free! As opposed to earned income which has a continuous hold on your time, residual income allows you more freedom to do other things after you've put in the initial leg work. So yes taking time to write a book or create a digital course takes time, but once you're done that's it- and the money continues to flow long after you're done.

CONS: Depending on the item / product or idea you decide to create and sell the time commitment may also come with a financial commitment as well. In addition, because residual income options and opportunities have started popping up everywhere, it can be a bit competitive. You must carve out your niche and find the proper avenue to sell your item where you will make the most profit.

7. Interest Income

Similar to dividend income, you are earning money based off of your commitment to a particular financial institution (IE: bank). Interest income is a definite type of passive income and you don't have to do anything except put your money into the account.

PROS: You can earn this particular income stream at just about any level of your personal finance journey. The easy way to do this is simply open up a bank account (high yield savings preferably) and place your money into said account. On a monthly basis you will earn money on the money you have in the account. Another way to do this is to open a CD or invest in government bonds to generate interest over a set period of time at a fixed rate. Interest income is also one of the safer more secure ways to make a stream of income over a period of time.

CONS: Interest income usually isn't a huge source of income for most people unless you have a large lump sum of money. The rest of us on average aren't earning enough to live off of, and with deceasing interest rates it is frustrating AF to see you've earned one cent from a traditional bank, and a tad more from a HYSA.

8. Inherited Income

This last income source you should know about is straight forward. Inherited income is the money you "earn" or is given to you/ passed down from a relative.

PROS: Well ... duh the obvious pro is that you have received a source of income that you didn't really need to do much for. It is also a great sign that generational wealth is alive and well in your family unit.

CONS: Inherited income ... is in fact income and will have to be reported to the IRS for tax purposes. If you are in school or applying for some form of financial aid, inherited income will impact your financial aid package.

I hope this overall outlook on the types of income sources you should know has been helpful for you to get the wheels turning on what income sources you're looking to add into your financial repertoire, and what income sources you already have !

If you found this helpful don't be afraid to share this with a friend, family member or nosey neighbor. If you're more of a visual learner or know someone that is I've also got you covered :

Catch you on the internet. Until next time,

Hey there! I'm Melissa, co-founder of Trials n Tresses, natural hair and beauty lover, binge tv watcher and lover of life. When I am not creating content for TNT, I'm busy teaching the future of society.
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