Would it shock you to know that there are three major types of income? Unfortunately, many do not know. Fortunately also, you reading this now will know the 3 different types of income. Not only would you learn about them, you will also learn to differentiate one from the other. This will be covered in this guide on the Differences Between Passive, Active And Portfolio Income.
When you work and you are paid salary and wages, what type of income is that? When you invest in shares, stocks, bonds etc, do you know it’s a different type of income? What about when you write books and sell them, what type of income do you generate from them? These and many more will be answered for you here.
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The knowledge of this Differences Between Passive, Active And Portfolio Income will go along way to help you. You need to understand what type of income you learn. You will also have to be able to understand how each works and see the best one you can focus on, if you really want to build wealth.
Differences Between Passive, Active And Portfolio Income
These differences will be seen by understanding the types of income we have. As you have seen from the title, we have the folowing
- Active income
- Passive income, and
- portfolio income.
let’s look at them individually.
1. Active Income
Keyword: ACTIVE. The Active income is the type of income you earn in exchange for a work you did actively. That is to say, it is the income for which services have been performed. This includes wages, tips, salaries, commissions, and income from businesses in which there is material participation. This is the level majority of persons operate in. When you are paid salary, wages and the likes, what you earn is referred to as ACTIVE INCOME. This is because, to earn the income, you must actively participate in the process. Once you stop working, you stop earning. It can also be referred to as EARNED INCOME.
Earned income is compensation from employment or the actual involvement of a business. Earned income is the worst type you can have. This is all income that comes from a paycheck, including hourly and salary income. Pensions are also considered earned income and are taxable as any salary income is. It is the most taxed form of income.
Keyword: Investment. Portfolio income is income resulting from paper investments like capital gains, dividend, and interest income that you might receive from ownership of stocks and bonds. It is an income derived from investments. This could include
- capital gains,
- royalties etc.
Essentially, portfolio income deals with income from your investments. Money you put into people’s business and they trade with it and share the profits and gains with you.
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Keyword: PASSIVE. The residual income comes from activities in which you do not actively participate. Such activities include income from real estate and certain business arrangements, such as limited partnerships. It is the income from a trade or business activities in which you do not materially participate. Is that possible? Why not. It has to be a system you set in motion which works for you. It brings income to you even without doing anything or being physically present.
Most types of passive income are derived from real estate/property, while other types of passive income are derived from royalties from patents or license agreements. An income stream falling into this category is one where money is received usually on a regular basis, where no additional effort has taken place. Most passive income streams require great effort to start with.
Examples of income from a passive/residual income includes
- Interest Income paid from bank deposits,
- rental income from real estate/property.,
- royalties from writing a book,
- dividends from shares holding.
- Income from network marketing.
- business income (which does not require the owner’s direct involvement).
The key idea in residual income is that you really do not need to be available before you earn. Furthermore, even in the event of death, the income will not cease because it is a system that has been set in motion to earn money for you.
If you have followed us on this Differences Between Passive, Active And Portfolio Income, you will understand that portfolio income and passive income have something in common: you don’t need to be present to earn. This is why most people classify it as part of residual income. In essence, they believe that we have only residual and active income.
So, what did you pick from this? Kindly share with us below. Do you have any question not handled here? We are here for you. Just ask!