Written by: Ishan Sadhukhan
Think about the people you see in your day to day lives driving a brand new Tesla Model X, BMW M4, or any other nice car. Do you ever wonder what kind of jobs those people have? Well, the truth is that those people not only have high-pay jobs but more than one source of income as well. The average millionaire actually has seven sources of income. Those sources of income can be categorized into earned income, portfolio income, and passive income.
So what exactly do these types of income mean and why do they make people rich?
This is the type of income that anyone’s 9-5 job would be categorized into. If you work any job and receive a paycheck, you are making money from earned income. If you ever have trouble figuring out if something is earned income think about it like this: if you have to put in more hours of work to proportionately make that much more money, its earned income.
However, earned income isn’t the type of income that makes people rich. The lower and lower-middle-class rely on earned income solely whereas the middle and rich class people incorporate portfolio income as well.
We already know that earned income is when you exchange time for money but what how is portfolio income earned? Portfolio income is earned through capital gains. Capital gains are simply profiting from the sale of an investment. Those investments can be categorized into stocks, bonds, options, ETF’s, real estate property in certain cases, etc.
Take for example an investor buys one share of Apple (AAPL) stock at $250. If the price of an Apple share goes up, the investor can sell that share of Apple to make capital gains. In this case, if Apple’s stock price went up to $300, the investor could sell his share to make a $50 profit.
Although portfolio income is a source of income all of the wealthiest people may have, it isn’t the reason why they are so wealthy. The top wealthiest people find ways to earn from passive income.
Some call passive income the eighth wonder of the world. Passive income will allow you to make money work for you instead of you working for money. Passive income is income earned from an activity in which a person is not actively involved or doing work. You are NOT exchanging time for money.
Remember when I mentioned how real estate can be portfolio income in some cases? Well, real estate can be considered portfolio income only if you are buying and selling real estate property and making capital gains from the value of the property itself. However, real estate income can be considered passive income if you are renting out a piece of property you own and you are paid recurringly. This is often known as “rent”.
Now that you’ve learned the three different types of income, you have the opportunity to diversify your earnings with all of them. But before you do that, take a second to notice the order in which I wrote about these types of income. Why did I write about earned income first and then followed by portfolio and passive income? The simple answer is taxes. The order signifies the amount of tax that is paid for each source of income. Earned income is charged with the most tax whereas passive income is often taxed the least out of all types of income. Ever wonder why rich people pay little to nothing in taxes? It’s because they have insane amounts of passive income sources in which they pay very low taxes.
Remember, it doesn’t matter how much you make, its how much you keep. Also remember that knowledge isn’t power, it is potential power. Don’t just read this article; take action and start new sources of income in each of these categories.
I wish you the best of luck!
Special thanks to Robert Kiyosaki’s Rich Dad Poor Dad book where I initially learned about the three types of income.