Active, Passive and Portfolio Income

Do you know which type of income you are earning? Well there isn't just one type of income -there are three!!

Let's find out..


1. Active Income

Active income is the income you receive from actively working. You work and you are paid for that. This includes salaries, commissions, wages, tips  and income from businesses in which there is material participation.

For Example: An employee who works for a monthly paycheck receives active income.

Key Features:

1. Income that is a direct result of your labor.

2. It's hard to become wealthy solely from earned income.

4. There are only so many hours in the day for you to work.

3. It's taxed at the highest rate.

4. Once you stop working, the money stops coming in.

NOTE:   A great way to switch over into better types of income is to use earned income by putting it into a portfolio or to start a side hustle or business.



2. Passive Income

Passive income is money generated from assets you own, where you are not actively working(so time is not a limitation). Passive income is also not subjected to self-emplcyment taxes,But similar to portfolio income, it might be subject to the Net Investment Income tax.. However, it is often treated differently by the Internal Revenue Service (IRS).

For Example: Earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved , royalties from patents/writing a book or license agreements, dividends from shares holding, Interest on bank deposits etc.

Key Features:

1. Passive income is income that would continue to generate if you  decided to do nothing. it flows to you or your family whether you are sick, or vacationing, or dead.

2. Passive income is the key to building wealth without investing too much of your time.

3. Another example of passive income come from network marketing/online earning.

4. Passive income receives the most favorable tax treatment.


NOTE: Most passive income streams require great effort to start with. But once it started generating income you'll be receiving it on regular basis with no additional efforts.



3. Portfolio Income

Portfolio income is income generated from selling an asset, and if you sell that asset for a higher price than buy price, you will have a gain (portfolio income is also referred to as capital gains). Capital gains simply defines how your portfolio income will be taxed. Income from investments, including dividends, interest, capital gains and royalties. Its a subset of Passive income.

For Example: Income from assets like  trading  stocks, bonds and mutual funds etc.

Key Features:

1. That gain might be taxed at ordinary income tax rates or capital gains tax rates.(Depending on the holding period of the asset).

2.You have to have money to invest to create a portfolio for income. portfolio income is made through capital gains.

3. You can start with a small amount and contribute to your investments over time.

4. This type of income can take a long time to generate (buy and hold the asset for years).

NOTE. If you're a trader and attempt to do it much faster, you better be really good at it, otherwise, it's sort of like gambling.




Above is the detailed view of types of income to help you choose the best one that fits your financial needs. One of the best things a person can do is to know exactly how he/she wants to make money.
Everyone should have a solid understanding of the three types of income.

"If You Don't Find A Way To Make Money While You Sleep, You'll Work Till You Die." -Warren Buffet