By: Pamela Martinez, JBS Corp.
Finance is a complex and multifaceted field that dictates most of the decisions we make throughout our adult life. Yet we are left to figure it out on our own—which is why we are here. Everyone wants to be wealthy, live a carefree lifestyle, and not worry about how they are going to make their next buck. But unfortunately, not everyone is adequately equipped with the information necessary to obtain financial stability. And the first step becoming well-versed in finance, is understanding the types of income.
- Active Income – Also referred to as earned income, active income is the most common type of income, built through regular compensations, such as wages and salaries. Active income provides an individual with financial security. For instance, a person working a regular nine-to-five job (i.e., teachers, lawyers, accountants, etc.) typically does not have to worry about where their income will come from. They’ll have the peace of mind of knowing their next paycheck will appear in their bank account on a weekly or biweekly bases.
Other examples of active income include tips received from hospitality jobs (i.e., restaurants, hotels) and commission earned from sales in retail employment (i.e., sporting goods stores, clothing stores).
Although active income provides predictability and security, you don’t want to get too comfortable and limit your earning potential. Consider exploring different types of incomes, such as the ones below.
- Passive Income – “Set it and forget it,” this is the phrase you’ll often hear associated with passive income. That’s because this form of income usually requires minimal effort to earn and maintain. Sounds too good to be true, right? That’s because it is. Many people do build their wealth through passive income but without the “set it and forget it” mentality—especially when dealing with the most prominent type of passive income; real estate. In owning rental property as the owner, you play many roles; landlord, plumber, property manager, and accountant. And yes, some companies handle all these roles at your disposal. However, the objective of owning real estate and is to earn extra income. If you’re getting started as a real estate investor, it’s unfavorable to opt into the use of third-party management because you’ll likely end up either breaking even or owing money. Both of which are counterproductive. If you find owning rental property as an appealing form of income, best practice is that you manage the property.
Owning real estate is not the only way to earn passive income. For example, peer-to-peer lendingand dividend stocks are other means of building wealth through the use of passive income.
- Portfolio Income – Or as we like to call it true passive income, portfolio income is slightly more complicated. Derived from investments and capital gains, It requires some knowledge on how to invest in the stock market. Banks and other financial corporations offer services in which they invest in the stock market on your behalf. But don’t shy away from investing in the stock market yourself.
*it’s important to note that portfolio and passive income are taxed much lower in comparison to the active income.
There is nothing passive about building wealth. Be wary of those individuals and companies that sell the promise of “get-rich-quick”. Wealth is not built overnight and requires a lot of hard work and dedication, even a few sacrifices.
It’s not unusual to feel stressed and overwhelmed when dealing with your finances, and the field of finance can be intimating at first glance. But keep looking, because when you do, you begin to build your financial literacy. And once you find out for yourself just how simple it is, you’ll start to realize you’ve been stressing for nothing.
