The 8 Types Of Income You Should Know To Achieve Financial Freedom
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.
Freelancing is a form of earned income. Nowadays, there are abundant freelancing jobs available on the internet, which you can do as a second job to supplement your income. If you don’t know where to begin, we have listed down some of the most common home-based jobs to propel yourself into the world of freelancing and remote work! Read it here!
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.
Running a business can indeed be financially promising and rewarding, but it also comes with a certain amount of financial risks. Before deciding on a business, make sure you’ve done your research and calculated the risks that come with it.
If you can’t think of any good business, we’ve enumerated some of the most promising business ideas today. Read it here.
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.
Peer-to-peer lending is a new form of lending and borrowing money that is performed through a platform that connects both the lender and borrower. P2P lending platform basically aims to help both investors and borrowers. While they may seem like middlemen, the transaction is done independently by investors and borrowers. The platform will just function as a tool for investors to connect directly with the borrowers and vice versa.
Among the popular P2P lending platforms are the following:
Invest within your risk tolerance. The platform categorizes the borrowers according to their risk level – the higher the risk, the higher the interest. This applies to any business that involves lending money to people.
Not all savings accounts are created equal. While all of them promise an annual interest for the money that you put in your account, the interest rates aren’t the same.
CIMB UPSave account is current currently the only savings account that has the highest interest rate in the market today. The account promises 3% p.a. Interest rates, where others are typically just around 1.2% to 0.5%.
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).
Dividends are money you earn from publicly listed companies for buying a share of their company. It’s basically an interest you get for investing in a company via a broker.
COL financial is an easy-to-use trading platform for investors to buy and sell shares in the Philippine Stock Exchange (PSE). Here’s our quick guide on how you can sign up and start earning dividend income!
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.
For starters, you need a property to have a rental income. If you don’t have a property yet but are in the market for one, read our property investment guide to learn more about how to find a property that’s a bang for your buck.
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.
Royalty income is not for everyone. Not everyone can build an empire like Jollibee. Having a business that’s worth franchising will really require extraordinary skills to pull off. This is not to say that it’s impossible to create a business model that is unique and repeatable, but it’s definitely not something that most people are capable of doing.
Other than businesses, royalties also apply to the following media:
- An original music
- An original product
If you’re a photography enthusiast or professional, you can earn royalties from your photos or videos through stock photo sites like Shutterstock.
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.
Here are some of the easiest ways to have a residual income:
- Selling a book
- Selling a course
- Being an affiliate
- Starting a Youtube channel
- Launching a podcast
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!