Seven Types Of Income — Why You Should Earn All 7 for True Wealth
Legally there are only 7 ways to earn money. They are:
1. Salaried Income
2. Self Employed | Profit Income
3. Interest Income
4. Rental Income
5. Capital Gains Income
6. Dividend Income
7. Royalty Income
We will discuss all 7 today, but the most important takeaway is that these are not mutually exclusive, you can earn from all 7 sources. Super-rich people make it a point to open up multiple sources of income at the same time. More on that soon.
1. Salaried Income: This is the easiest income to earn. All you need is to find a job and work under someone. You might be skilled at something— an engineer, a surgeon, or an academician. To utilize your skills, you might have to work somewhere — a construction company, a hospital, or a university. You get paid in exchange for your skills. The better your skills, the better will be the pay. A job brings the certainty that you will get paid every month. The biggest disadvantage is that if your employer does not grow as fast as the market, you may get laid off.
2. Self Employed | Profit Income: You buy something for ‘10 and then sell it for ‘15, you earn ‘5. The ‘5 earned is your profit income. Before the Industrial Revolution and the creation of jobs, all of us had a profit income. If you are a self-employed professional or business owner — what you actually get is a profit income.
Let me explain. A cobbler polishes the shoe for you and charges you ‘5. The income earned is not salaried because he gets the income in hand and on the spot rather than through an institution at the end of the month.
If you were a farmer and sold 10kg of wheat at ‘100 wherein your production cost was ‘80, you earn a profit income of ‘20.
If you were a business person and sold products worth ‘1000 wherein your expenses were ‘800, your profit income becomes ‘200.
Self-employed people and business owners take a higher risk than jobgoers and the returns are proportional. If your business is successful, you end up earning more than an average employee. If you fail, you end up in poverty much faster.
3. Interest Income: Everyone is familiar with Interest income. You deposit your hard-earned money in a bank and they pay interest as long as you retain the deposits there. If you had deposited ‘1000 in the bank and their term deposit rate was 10%, then you would get ‘100 every year as interest income.
You can also ask them to repay your original capital of ‘1000 and when you do that, the interest income stops.
4. Rental Income: If you let out your property, the tenant pays you rent every month. The property can either be residential like a house or commercial like a shopping mall or IT park. Rental income is something we all yearn for, owning multiple properties and getting a cool passive income is definitely on our things-to-do list.
The demerit is, to generate rental income — you need to create assets first and that gets done either by a salaried income or profit income. Also, investments in real estate could have positive or negative returns when you consider how you funded it. If you used debt to build your assets, there is every chance the real returns could be negative.
5. Capital Gains Income: When you sell an asset at a higher cost than its procurement cost then it results in a profit. This profit is called Capital Gains. Just like rental income, you need to create an asset first via salaried income or profit income. Later on, when you mark up this asset and sell it off, you can realize capital gains.
Buying stocks, mutual funds & gold are all considered as assets, that is why when you sell them — you get a capital gains tax statement.
6. Dividend Income: The profits paid out to you from a business that you own are called dividends. Unlike the “2. profit income”, you need not be an active promoter to receive dividend payments. All you need to do is just remain a shareholder.
Suppose you hold 1000 shares of Unilever, the payouts you receive when they reward their shareholders are the perfect example of dividend income. You may not even have taken an active role in their management or business decision, yet you got paid.
Owning shares of good companies may give both capital gains as well as dividends.
7. Royalty Income: This income is pretty difficult to explain as 99% of people have not realized it and the 1% who earn keep mum. Artists get paid via royalty income. They work on a particular project or piece and then sell the rights to a company, in exchange they get a legacy income — also called a royalty.
An example would be a YouTube video that you upload. As long as that video is generating views, you get paid for it. Another example would be a book that you had published. As long as it sells, the publisher will pay you a royalty.
Now that you have learned all 7 types of income, did you notice that I had arranged them from the highest level of active effort to the lowest? Incomes like salary and profits are examples of active income — you get paid only when you work.
Rest all incomes are passive. Your efforts may be a one-time activity, but after that, the source of income never stops. People who earn the “7. Royalty” income are the richest.
Getting a job or starting a small business is easy, but requires active efforts. Whereas earning a dividend income or royalty income is complex but does not require repeat efforts.
I have 6 types of income at present. Yeah, the bucket list that I am yet to fill is the “4. Rental Income”, because none of my properties are generating cashflows.
My Royalty income comes from book sales & articles I have written. The income is negligible and only pays the monthly internet costs. Still, I am glad that I got that source tapped.
As a wellwisher, I request you to aim and fill all 7 types of income buckets. Even though the value of income could be negligible at the start, with the right kind of effort you may be able to grow it much further.
When your passive income reaches 50% of your active income, then you are on the right path to Financial Independence. Just keep walking, the next stop is richness.
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