Never think that the only way to make money is to trade your hours for dollars.
Why not make money with your money? Better yet, why not add money to your bank account from a job you were doing before?
Limiting yourself to just one type of income is a very risky way to make a living. The purpose of this article is to explain the three types of income and the pros and cons of each.
- Earned Income – The most common type of income you know is earned. Simply put, earned income is what you get spending hours trading dollars.
Earned income is very easy to do, but very easy to lose. If you are made redundant, you will lose your income.
- Passive Income: My favorite income is passive. Passive income is income from previous jobs.
Examples are
- Own rental properties
- Types of online businesses requiring little or no direct participation
- License fees for the publication of books or music
Getting 100% of your income from passive sources takes a little more creativity, but it can be easily done with the internet in particular. There are many ways to generate residual income online very quickly. Some examples are writing an e-book or making an online video.
- Portfolio income – If you have a savings account, you receive portfolio income on a regular basis. Portfolio income is income from paper assets such as stocks, bonds, money market accounts, savings accounts, etc.
There are three types of portfolio returns.
- Capital gains: proceeds from the sale of a paper asset
- Dividends: earnings transferred to shareholders
- Interest: income from investments such as savings, checks, certificates of deposit, money market accounts and bonds
One downside to portfolio income is that you have to invest a lot to earn a lot. Therefore, you can only live off the income from your portfolio at a later age.
The typical path to wealth today is to raise as much money as possible and build a portfolio of stocks and bonds. If you no longer want to trade your hours for a salary, live on your wallet.
This way of building wealth is simple, but risky. As we saw in 2008 and 2009, investments are quite stable and jobs can disappear quickly.
Diversification is an important theory of asset management often associated with investing in stocks. Diversification is the opposite of putting all your eggs in one basket. Instead, put lots of eggs in lots of baskets.
Diversification is not only important when managing a portfolio of stocks. It is also a good practice to diversify your income. When an income source is deactivated, you must replace it with another- the Key to income diversification.
Since you spend hours trading dollars, the diversification you can achieve through income is limited. Having said that, you can’t have three full-time jobs.
It is easy to diversify your portfolio returns with index funds. However, you have no control over the performance of each individual fund. Fixed investments like CDs are an option, but they are very expensive if you want the interest on a CD to have enough income to live on. Plus, you run the risk of investing again when interest rates drop.
Of any type of income, passive income is the income over which you have the most control. You can also have as many passive income streams as you want. This makes it the most secure and sustainable income you can have.
When you start to learn how to convert income to passive income, financial freedom and abundance are not far away.
