Income is a word that should be synonymous with business. After all, without income, you have no business. You hear about income when people talk about their salaries or their side hustles. You hear about it when people discuss budgets and taxes and retirement plans. It is such an integrated part of everyday life that many don’t stop and actually think about what it means.
The truth is, income is more than just a pay cheque. Money can come into your life in a dozen or more ways; whether it’s work, investments or otherwise. And, once you understand the different types of income, it becomes so much easier to build a growth plan and a more secure future.
In this article, we will discuss the main types of income, and why you should care about them.
What is income?
In broad terms, income refers to the amount of money that you receive on a regular basis, from a variety of sources.
For most people, when they think of their income they think of their employment and their monthly pay cheque. Of course, this is certainly one type of income. However, it isn’t the only one.
Business owners might view income slightly differently, as they have to think about their profits and their expenses, and their revenue. Income is less predictable for business owners, but offers more opportunity for growth over time.
What are the different types of income?
1. Earned income
Earned income is the most familiar type of income, and is what most people will start their careers with. It is the money that is received during employment, or in return for your time and labour. If you get paid for working a job or providing a service, that payment is earned income.
When it comes to financial planning, earned income is the starting point for most people. However, it relies on being in active employment. If that job is lost, the income immediately stops.
2. Business income
Business income is very similar to earned income, but with one big difference – the income comes from profits rather than wages. This income can be from selling products, or a service provided, operating as a business owner rather than an employee.
There is more opportunity for growth with business income, but it can certainly be less predictable – especially when just starting out.
3. Investment income
Investment income comes from putting your money to work, rather than through any type of employment. For example this could be via dividends from shares, or maybe from interest earned through savings.
Unlike earned income, investment income can continue when you’re not actively employed. This is why it plays such a big role in long-term financial growth.
However, investment income does require a certain amount of capital, and can of course carry a degree of risk (depending on the investment).
4. Rental income
If you own a property, rental income is the money made through payments from tenants, i.e. rent. This could be from all types of properties, including residential, commercial, or even through holiday lets (Airbnb, etc).
Rental income is semi-passive, as it does require ongoing work, like maintenance. For many people, owning property to rent out is a life objective, helping to plan for their financial future (retirement).
5. Passive income
Passive income is an enormous buzzword in today’s society. However, it is often misunderstood. Passive income is money earned with minimal day-to-day effort – after the initial setup.
For example, if you have written a book or created a song, income is earned via royalties. Automated online businesses or income from investments are also types of passive income.
The common misunderstanding is that passive income is effortless. Income streams don’t come for free overnight. They require a significant amount of work beforehand.
6. Portfolio income
Portfolio income is closely linked to investment income and typically refers to money earned from financial assets like stocks and bonds.
While there is overlap with investment income, portfolio income is often treated as a unique category, particularly for tax purposes. Depending on the country and the type of asset, portfolio income may be taxed differently from earned or business income.
7. Transfer income
Transfer income is the type of income received via government support. It is the first in our list that doesn’t come from work or investments. For example, it could include pension payments, child support, or disability benefits.
This income type is particularly helpful during periods of change, like when you retire or go through unexpected hardships. And, while it isn’t ‘earned’ in the same way as other income types, it still plays a vital role for many households.
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Why does understanding income types matter?
There are many different reasons why you should understand the different income types. It can help to:
- Build a more resilient and detailed financial plan
- Reduce dependency on a single type of income
- Plan for retirement
- Understand taxation
- Set realistic goals to build wealth
Most people will start with earned income, and then gradually add other types over time, such as investment income. The most financially secure households often have multiple income streams working together.
Using income to plan ahead
Each type of income has its own risks and its own strengths. By understanding the different types, you can start to make more intentional choices about how to plan your financial future.
At Brixx, we believe financial clarity starts with knowing what you’re working with – and income is one of the most important pieces of the puzzle. Understanding how reliable it is, or how it might grow, is key for long-term growth.
By using Brixx, you can model all of your income types, test a variety of scenarios, and build a picture of your financial future that makes sense to you. Get started today for free.
