The 8 Types Of Income You Should Know To Achieve Financial Freedom

Written by Marc Adrian

Prudent financial spending may save you a few pesos here and there, but having multiple streams of income is the more realistic approach to hit those big-ticket financial goals – like achieving financial independence. Saving money is good for sure, but that alone won’t give you the real boost that you need to reach such a goal. 

If you can establish multiple income streams you’ll have various cash flow sources coming in. You will be in a much better position to fulfill any financial endeavors even if one of your sources of income fails. This is one of the reasons why affluent people got their finances together, and true enough it does not just provide food on the table, but also a financial safety net.

If you want to go down the road to being financially independent, the best place to start is learning about the available options you can immediately work on such as your income. And talking about income, we’re glad to tell you that there are 8 types you can actually pursue to make earning and saving more money a less difficult feat to do. 

Here are 8 types of income streams that you should know about. 

1. Earned income

The most basic form of income stream – it’s the income that we get in exchange for our time and effort like the salary from our jobs. It doesn’t matter if you’re doing it full time, part-time, or as a second job, as long as you’re pouring your time for money, it falls under this category. 

2. Profit 

An income that you can get by selling something for more than it cost you – a business basically. This is the second most common source of income and unlike earned income, the amount of money you’ll earn won’t heavily depend on your time and effort. 

3. Interest income

Interest income is the money that you earn y lending your money and charging interest or it could be from a savings account or time deposit.  This is a great source of passive income, and there’s a minimal risk especially for the savings and time deposit. 

If you want a passive income where you won’t need to put in the much effort to grow your money, this is the type of that does that. Interest income may seem like it has the lowest return of them all, but in the long run with a good amount of money in place, in compounding interest, this will be the ultimate passive income that many of us could only dream of. 

4. Dividend income

Another source of passive income, it’s much like the interest income but better. You become a shareholder of a company and at the same time earn from the amount you’ve invested in them. The simplest way you can engage in this is through the Philippines Stock Exchange (PSEi).

5. Rental income

From the word itself – rental. You earn by renting out an asset or property. It’s pretty self-explanatory. This income is clear cut and probably among the most dependable but the drawback is that you have to have a property or an asset that is rentable. You may need to shell out a good amount of money to obtain such valuable assets. 

Despite the investment that you need to have this kind of income, it’s worth noting that owning a property is already a good investment opportunity itself. You can choose to sell it if rental income doesn’t serve your purpose anymore.

6. Capital gains

It’s the money that you earn for buying then selling an appreciating property or asset. It’s almost like a business, the difference is, you’re flipping a valuable asset (like properties, cars, or even a website) instead of low-cost products. 

This term is usually common in the investment market, but it isn’t just limited to mutual funds and stock exchange. Apparently, it’s an act of investing in something for a lower price with the intent of selling it for a higher price. 

It can be anything – from stocks, vehicles, stamps, antiques, or even action figures, as long as it’s about generating more money from buying and selling. 

7. Royalty income

It’s about making money from using a concept, idea, or product that you own. You don’t need to do the heavy lifting for the business to earn money, you just lend them your intellectual property and you get paid for it. 

One good example of this is the famous fast-food chains like McDonald’s and Jollibee, or the convenience store 7-11. The owners of these brands are paid by their franchisee for using their processes, their logo, and marketing, as well as their business name, to earn money. 

8. Residual income

This type of income is a form of passive income where a product you’ve created continues to generate money for you. With the advent of digital media today, residual income generating platforms are now more common than you think! They just need tremendous effort for you to get started. 

In a perfect world, we should be engaged in at least 5 or 6 of these types of income streams. But in reality, not everyone can achieve that. Even the most renowned millionaires don’t have all 8, many of them barely have 3!

Bill Gates for example only makes money through royalties and profits from Windows. But those two propelled him to be among the world’s richest because he was such a genius that Windows changed the world. The same can be said with Warren Buffet, he didn’t have all 8 streams of income, but he became a billionaire with just dividends and capital gains.

One thing that this should tell us is that a thorough understanding of an income stream that works best for you, putting in the work that it needs to flourish, and having the patience to sit through the entire process is the key to financial freedom. There isn’t a shortcut to making money, but honing more than one of these income streams and being good at them will make your financial endeavors easier to conquer, and ultimately achieve your financial freedom!