From Passive to Active Income: The 7 Different Types of Incomes You Can Earn

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Why do you need different types of income? Well, one of the riskiest things you can do is only have one source of income.

Even if you love your job (and I love my corporate job) you want to have other sources of income.

The average rich person has 7 different sources of income and these are both active and passive.

Today we are going to cover many of these different types of income.

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These ideas are based on my personal experience and opinion and should not be considered professional financial investment advice. Furthermore, the ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

What Are The Different Types Of Income You Can Earn

There are many different types of income you can earn, but they can broadly be classified into two categories: active and passive. Active income is earned from working, usually in the form of wages or a salary. This is the most common type of income and is what most people rely on to support themselves and their families.

Passive income, on the other hand, is earnings derived from investments or other sources that require little or no effort on your part. This can include things like dividends from stocks or mutual funds, and interest from savings accounts.

There is also a type of income that I like to call passive-ish income. This is what most people refer to when they talk about passive income. It means building something for sale (like a digital product) once and then selling it in different channels. The reason it is passive-ish is that you need to tweak your search engine optimization or ads (if you run them) because things change. There is nothing you can build online and then never have to touch again for the next 20 years.

Rental income falls into the passive-ish income spectrum as well. Unless you use something called a REIT (more on those below).

While active income is generally easier to obtain, it is also risky because one person controls your future. Maybe even a person that has never met you. I have worked for many Fortune 500 companies in America. I have seen 15% of the workforce cut overnight. Entire departments that were critical to the operation of the company, were gone because an accountant just needed to remove $15 million from the salary books.

No one in a company is safe. No one is replaceable.

If Microsoft could survive Bill Gates stepping down and Apple survived the death of Steve Jobs you can be fired and replaced.

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The 7 Types of Income The Rich Use

According to the Millionaire Next Door over 80% of millionaires are self-made. This is because they figured out how to diversify their income streams. So let’s go over each of these streams in brief.

Earned Income

This is what most people are familiar with. It is your active income from working at a job for an employer. This is where all of those self-made millionaires got started.

Robert Kiyosaki in his book Rich Dad Poor Dad speaks about working for Xerox to learn how to be a top salesperson. Millionaires look for jobs where they can do to learn skills that they can use for their other ventures. You should do the same.

Profit Income

Profit income comes from opening up a store or business. It means you develop or buy a product and sell it for a profit. This could be active or passive-ish in nature.

I have an Etsy store (shameless plug, but click on the link and buy something anyway because you are my favorite person 😉 – LOL) and I got a notification on my phone while I was writing this article. A total stranger on Etsy went to my online store and bought 19 different things. This means that I made about $32 while doing something else. He used a first-time customer discount code. It pays to read people, all my stuff has discounts on that store but you got to read.

I can’t tell you how awesome it is to be sitting at dinner and see that part or even all of the bill will be covered by a notification that someone bought something that you created months or even years ago and almost forgot about it.

So here is where the magic comes into play and what I want you to understand.

• Create something that solves a problem someone has.
• Put it in a place where people that have that problem will see it.
• Charge for it.
• Make money while you sleep.

The stuff the guy above bought was to learn to play a game better. It doesn’t have to be a profound problem you need to solve. Now the bigger the problem you solve the more money you can charge to solve it.

Now it may not be life-changing money, yet. But it isn’t entirely passive. You have to make, sell and figure out how to find customers. That isn’t passive at all and anyone that tells you differently has something to sell you.

If you want to make a lot of money on things like this you need to be ACTIVE and learn a bunch of new skills to then eventually move to passive-ish income.

How Can You Succeed Financially?

There is a clear path toward financial success and security.

It isn’t just being a worker for 45 years. Although for some it may involve that.

If you want to know what practical steps are needed to achieve financial freedom read my article on how to achieve financial freedom.

Interest Income

Interest income is from loaning your money to others and getting paid back a small amount in interest. Assuming you loan your money to people that are trustworthy then this is passive income!

Banks will give you amazingly LOW interest to use your money to invest in the stock market and real estate and kick you back 0.25 to 2% interest (normally around 1% or less).

What Are Bonds and CDs

Interest income can come from buying bonds or Certificates of Deposit (CD) at your bank. A CD is a way to store your money short term and make better interest than a savings account. They are good for storing long-term funds in to make some money on them. Things like a down for a home that isn’t needed for 6 months. Some people will save yearly for a vacation and stick some of that money in a 6 month CD.

Others like their money in government bonds (bond is a fancy term for debt). If you buy a bond you are loaning money to the government (or company if it is a company bond) money and they promise to pay you a certain percentage of your money back every year and then the entire balance in 5 or 10 years (typically some bonds are longer or shorter).

Many people have a lot of money in bonds in their 401k and don’t even know it. Bonds rarely pay out above 5% and when the federal reserve had rates near zero bonds were promising around 2% returns, which is a big blow when inflation went to 8 – 11% in 2022. You are locked into a debt paid down for 5 years paying 2% and money is dropping in value by 8 – 11%. Yes, I will loan you money at that rate as well.

Dividend Income

Dividend income is one of my favorite types of income. Some companies will take a percentage of their quarterly profits and give it back to those who own stocks (called shareholders) money every quarter. If Microsoft or AT&T do well then will pay a percentage of your stock back to you in the form of cash. You didn’t sell your stock or shares and the company was like “here is free money, because we did well this quarter.“

This is truly passive income except for buying the stocks or shares, to begin with. There are several ways to buy stocks. If your company offers a 401k program please invest in that. Your dividends will be automatically reinvested in your account. So if you get $100 worth of dividends that quarter, you would try to buy more of those stocks that paid you the dividend.

When you retire you won’t be reinvesting those funds and you should get a quarterly check from all the companies you own that pay out dividends.

If this sounds fascinating, I highly recommend you read my article in the green box below to learn the foundation of investing.

Where Is Your Money?

Most people don’t know what they are invested in when they start a new job and open up a 401k.

Do you know exactly what the fund or funds you are investing in even are?

How much are you spending on fees?

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If you already invest in a 401k or IRA account and want to invest in individual or other types of stock then I recommend Robin Hood. You and I will get a free stock if you sign up and put in $100 to buy stocks. If that is of interest to you use the link above.

Rental Income

Rental income is how most millionaires stay wealthy and how some made their wealth. If you read my article on what is a rich mindset and how you get one then you know that the three things rich people do are to invest (to get that Dividend passive income / start a business to get that profit income / buy real estate to get rental income).

There are a lot of pros and cons to rental income.

Pros:

• Passive-ish in nature (if you outsource management / repairs / collecting rent / evictions / finding renters)
• People will always need a place to live
• Renters pay the debt on the property
• Renters cover all the bills
• And they put a little bit of money in your pocket
• You get an asset with little money down and someone else paying the bills and paying off the mortgage

Cons:

• Requires lots of money upfront (20% of the mortgage typically)
• Management of the property
• Repair of the property
• Collecting rent and hounding people for late rent
• Evicting those that don’t pay rent for months
• Finding new renters
• Major surprise repairs

There are no ways to make money that are without risk.

Some people LOVE rental property and others HATE it, even with a property manager to handle fixing toilets and evictions.

If you want an alternative to owning rental properties with as little as $100 down the last time I looked check out Fundrise. This is a Real Estate Investment Trust and there are others that can be found even for your 401k or IRA. You are loaning your money to a company that uses your money to buy properties. They do all the management and then pay you a dividend or interest income on your money. Note it is easy to get a percentage of your money back quarterly or annually but takes a little time to withdraw the initial amount you put in.

Get a Handle on Your Finances

Knowing what your net worth is and how your actions impact your financial future is probably the MOST important thing you can do for you and your family.

Find out how to do it quickly and put it on autopilot. Money doesn’t have to be hard.

Click here to read How to know your net worth and why it matters.

Capital Gains Income

Capital gains income is probably something you have heard about but maybe don’t understand but it is one of the biggest ways the rich make wealth.

Capital gains income is when you sell a stock for a profit.

Sounds simple right? Everyone says buy low and sell high and that is how the market works. Sure but most day traders (people that buy and sell stocks more than 5 times a day) lose money in the long run.

But the rich are normally a member of a board of directors at a large company. For their time sitting on the board, they are gifted thousands to millions of dollars in company stock. Since they are on the board of directors the concept of giving them part ownership in the company in exchange for their expertise makes sense. They want their stocks to grow in value so they help the company they are partnering with to make themselves more money.

There are a ton of rules and tax laws that are always changing with the next president but suffice it to say if you can get the free stock you should do so. If you have the skills, knowledge, and talent to serve on a company board of directors you should think about it.

But most people won’t see capital gains income as a source of wealth, even though it is one of the lowest taxable income devices on this list (with real estate being arguably the lowest). Note that earned income is typically the group that pays the most taxes and has the poorest and middle-class people only making money from that one source.

Royalty Income

Finally the last one on the list. Royalty income is for all of you thinkers and inventors out there.

If you invent something and sell the patent (the sole right to use that idea or item) to a company they can agree to give you a percentage of the sale on anything using your idea.

I used to work for Visa (yeah the credit card company). It was the only company I have worked for that openly stated that if you had an idea for the finance industry they would help you patent it. Give you a $5,000 bonus if they submitted the patent. $10,000 bonus if the patent was accepted AND give you a % of each sale that used the patent to make the process of swiping your credit card easier, faster, or more secure.

Let me put it this way. There was a woman there who probably made more in a month off of her royalty patents with the company than her salary. She stayed because I think she mostly just thought of new patents to let Visa use.

This is probably by far the hardest way to make money.

• You need to have an idea that solves a problem
• You must have a unique solution for the problem
• Build a working prototype / prove it works
• Then navigate government bureaucracy and paperwork
• Find a company to buy the idea and pay you a monthly check

So you can see why that woman stayed. Visa paid her for them to do the paperwork and she already had a buyer lined up.

Royalty income is very active until it is 100% passive.

Those are the 7 different types of income the rich use to become or stay rich. There is no one way to make money, in fact, you shouldn’t follow just one path to get rich. You have seen that some ideas mix and match different sources of these incomes, like Fundrise which is like real estate investing, but also like interest and dividend income.

Are you living your best life or are you stressed about paying the bills?

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I used to live paycheck to paycheck and after years of paying off debt and maximizing my investments I am now able to save and invest more than 45% of my wife and I’s gross pay.

This allows me to live comfortably (not a crazy rich person) and sleep better at night. If you want this let me know where I can send it to you below.

Wow, you read a lot to get here. Can you do me a favor, please? Can you leave a comment if this was helpful to you or if I missed something? Alternatively, it would help me out a lot if you shared this content with those that might need to see it. Thanks, you are the best!

The Seven Different Types of Income

Most people have active income from their job. Perfect you have started and you can deep dive as much as you want into a career.

But don’t stop there!

What else could you do? What else could you learn?

Do you want to start a business on the side?

Or do you instead have great ideas and want to invent something that can be sold for royalties?

Maybe you like more passive income so you take as much money as you can and invest in the stock market.

There isn’t a right path. The right path is to get as many of the above as you can.

If you want to see how to create a profitable business from a friend of mine click here.

About Dwight Scull

I have been married to my wonderful wife, Rebecca, who puts up with me since 1999. I am a proud father to my Gen Z, son, and daughter-in-law. Grandfather to my favorite granddaughter who was born in 2021.

I lost my mom, father-in-law, and 12 others in 2013 and was DEEPLY in debt. I started reading and watching all the financial info I could find.

I chipped away at my debt and went from a negative $105k net worth having one home paid off, no credit card debt, and saving/investing 45%+ of my gross salary.

I used these daily habits to lose 100 pounds and keep it off.

I believe that you can overcome any challenge you face if you just take small daily actions and be consistent with them. It is how you will be financially successful.

Join my free Facebook group to get a ton of free resources to help you get out of debt, learn how to invest your money and work toward having the option of retiring early.

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