The Three Types of Income and Their Advantages and Disadvantages

The three types of income

 

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The word “Income” is something that is music to our ears. It’s something that, once you hear, you can’t help but smile because it allows you to buy not just the things that you need, but also the things that you want.

However, do you know that there are three types of income? And not all of them are the same. There are advantages and disadvantages to each of them, and knowing these factors might give you the edge over other people who aren’t particularly knowledgeable about these things.

Join us as we discuss the three different types of income, and be on your way to becoming the next Robert Kiyosaki or  Warren Buffett.

1. Earned Income

A mechanic holding a wrench

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This is the most typical type of income. This means that you’re getting paid for your time and expertise in whatever field you’re in. We often see blue-collar jobs being romanticized in movies or TV–and don’t get us wrong, this is a noble way to earn your money, but no one became a millionaire just from being a blue-collar worker.

There is no such thing as a stable job in an economy that fluctuates every day. The pandemic taught us that no matter how steady you think your job is, there is always something that might derail it.

But the pandemic is an extreme example, and it doesn’t happen every year or every month. According to this article, about 20% of businesses fail in their first year, and by the fifth year, only 50% survive. That’s not even taking the pandemic into consideration. How can we be sure that our job today won’t be gone in five or ten years’ time, then?

Advantages of earned income

A picture of a bill

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Saving your money is possible when you rely on earned income, albeit slowly. Earned income allows you to stay afloat, and it will enable you to pay your bills on time. The cash flow will also be stable, as long as the company you’re working for still exists.

There is also the chance for a promotion, which will bump up your salary. As long as you keep the same lifestyle as before the promotion, the rate you can save will also be faster.

Disadvantages of earned income

A closing down sign

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One huge disadvantage of relying on earned income is that it’s usually just enough to cover the bills and household expenses. Sometimes, you will find that you’re left with little to nothing to save at the end of the month.

It’s not uncommon to see people working 2-3 jobs just to make ends meet. Sometimes, both parents will be working, thus, minimizing the time they spend with their children.

To double down on the point made earlier, you will also be at the mercy of the company’s stability. The company might have good management, and everything is else is okay, but if it’s the economy itself that crashes, you can’t do anything about it.

2. Portfolio Income

Picture of stocks

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Portfolio income refers to the income you generate by playing the stock market right and selling your stocks at the right time. Portfolio income runs under the principle of capital gains, meaning if you buy a stock at $10, and that company’s stock rose to $30, you have a capital gain of $20.

One thing to remember in stocks is to “buy low and sell high.” You always have to feel the pulse of the stock market. Another thing of note here is that you have to have multiple stocks so that when one is on the losing side of the market, your other stocks that are doing well can salvage your overall capital gain.

Advantages of portfolio income

Stocks gaining

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The stock market works in a way that is pretty simple, yet hard to master or predict; if the company is performing well, its stock is higher. So imagine if you bought stock from an underperforming company, and then suddenly they come up with something that skyrockets their sales, you will also benefit from that.

The beauty of portfolio income comes from earning big when a company you’re a stockholder of makes it big as well. That’s why it also requires careful monitoring of the stock market, extensive research, and knowing the perfect time to sell your stocks to succeed.

Disadvantages of portfolio income

Stock market loss

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The stock market, however, is like water, it rises and it falls suddenly, and you’re at the mercy of those waves. One day, the company you’re a stockholder of may have huge gains, only to have it turn into a loss the next day due to unforeseen circumstances.

In terms of stability, even the earned income can be considered more stable than portfolio income. In earned income, if you perform well, your job is secure for at least a couple of months.

However, relying on the stock market is very unstable every day, and it requires a lot of research and focus.

3. Passive Income

Letting the money work for you

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Put simply, passive income refers to investing in something or putting up a business that will generate revenue for you continuously even without you there. This opens up the opportunity for you to do other things that will generate cash flow and will, in turn, make you a lot of money.

Owning a franchise of a fast-food chain or investing in real estate are some examples of passive income. If you are creative, you can write books, produce music or make applications that supply a steady stream of money through royalties.

Advantages of passive income

Earning money remotely

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Having a passive income enables you to venture into other money-making opportunities, and it lets the money work for you. The possibility of earning a huge amount of money is also there since businesses or real estate typically generate a lot of income.

If you are shrewd in your decisions, your business or businesses will also start to get bigger, which will generate a lot of income.

Disadvantages of passive income

Investing or putting up a business requires a lot of money. You have to have a lot of money you’re prepared to lose as well, just in case the company fails. Similarly, writing books or producing music that will give you royalty also requires the right skills, which can take a lot of time to master.

You also have to be business savvy or have an excellent financial IQ, as Robert Kiyosaki puts it.  Diving deep into a business requires a lot of knowledge, which, in turn, requires a lot of time to acquire.

Conclusion

Each type of income has its advantages and disadvantages, and it requires careful judgment on your part for you to know when to venture into each type. However, knowledge is power, and now that you know the different kinds of income, you now have complete control over whether to explore another type.

We hope that we have shed some light on your alternative options to gaining money and increasing your cash flow through this article. And we hope that this will be your first step towards financial stability.

 

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