Income Types: Earned, Portfolio and Passive

by James on 03/05/2010

Image of highway sign with an exit to financial freedom

Almost every one of us has a salary. If you do, then congratulations because this really is an important step. Next is to live within your means. Most people tend to raise their standard of living each time they receive a pay raise. It is so easy to do. I am guilty of it. The key is to refrain from using up your entire paycheck each month on expenses. What we do with this extra cash each month is the key to achieving our dream. Invest it wisely. So, what do most people normally do with it and what should we do with extra cash to achieve financial freedom?

To begin, let’s talk about the 3 types of income:

Earned Income

The money that we make from our 8am-5pm jobs is called earned income. We work hard for this money each and every day of the week. If you don’t show to work or use up all of your sick time and vacation time, you’ll stop getting paid… if you don’t get fired first! Do you remember what most of our parents told us when we were younger? Didn’t they say something like this?

Go to school and study hard, so that you can get a good paying job. Work hard so that you can receive promotions and pay raises. Save some money so that you’ll eventually be able to retire.

Because of this, most of us have a job. And, the most important thing at this point is that your monthly expenses do not exceed your paycheck.

Portfolio Income

Most of us invest in our retirement by signing up with retirement plans like a 401k through our employers. Other than buying new vehicles, jewelry, clothing, electronics, etc., retirement investments are where most people put their extra monthly cash. Maybe some of you even have additional money to place into a Traditional or Roth IRA, or other stocks, mutual funds, CDs, bonds, etc. The money we earn from these investments is called portfolio income. This is what some experts call the speculation game. Why? Because most people just sign up for these investments and hope that there will be enough money for them to retire when that time comes. As we have seen in the past few years with the stock market crash and economic downturn, people can lose just about everything by depending on this source for retirement.

Passive Income

Passive income is money that is received on a consistent basis (like a paycheck without the job) that requires little or no work to keep the cash rolling in. I bet this is what everyone wants, right? Unfortunately, this is the type of income that most people have never had and will never have. Why? Well, in some cases it is a matter of not having the right type of education. Poor investment choices can be all that stands in front of you. There are many passive income sources to choose from! In other people, fear blocks them from passive income. Which ever the case is, they can both be overcome. Desire for financial freedom is enough for me!

Hopefully, this has helped you understand the 3 types of income and which type is necessary for achieving financial freedom. Get educated and work through the fear!

Related posts:

  1. 7 Passive Income Sources To Achieve Financial Freedom
  2. Who Wants To Retire Early?

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