7 Types of Income & Why Your Financial Future Depends on Them

Many people feel stuck financially, working as much as possible for as much they can get, yet never able to save meaningful amounts of money. A large number of people live paycheck to paycheck, which means that losing their job or having any unexpected expense can throw their lives into turmoil. The government says 40% of American adults can't afford a sudden emergency of $400 or more.

The problem for most people is that their mindset concerning money doesn't move past the idea of selling their time. They get a job, show up for a set amount of time, and get paid for that many hours. When they need more money, they seek another job where they'll sell more of their time. Getting out of that, "This is the only way" mindset is the key to future financial success.

Passive Income

We've all heard a lot of talk about so-called "passive income" and most people hear that term, assume it's a get-rich-quick scheme, and dismiss it without much thought. The problem is that the term is misleading.  

Too many people misunderstand what it actually is. Passive income isn't the same as free money. You still have to work at something to make money, you just aren't selling your time.

7 Most Important Income Types

These are the top 7 general categories people discuss when talking about having multiple income streams.

1. Earned Income

This is the money you get from your job. Generally, this entails some form of selling your time.

2. Profits

This is the kind of income you get from selling something for more than it cost you.

3. Interest Income

This is money you make in exchange for lending someone money over time. Common examples of this include:  

  • Savings Accounts
  • Bonds
  • Loans

4. Dividends

This is the money you make from investments. If you're a shareholder in a company, then the money they pay you out of their profits, usually at the end of every quarter, is a dividend payment.

5. Rental Income

Rental income is the money you make as a result of letting others use something you own. This can include:  

  • Property
  • Living Space
  • Other Owned Resources

6. Capital Gains

Capital gains refer to money you make as the result of a rise in asset value. If you own something and its value increases, the difference is your capital gains. These can include:  

  • Stocks
  • Property
  • Cryptocurrency

7. Royalties

Royalty income is money you get as a result of allowing others to use something you own. Well known examples include:  

  • Franchises
  • Music
  • Apps
  • Images

What All This Means for You

It's best to have as many of these different types of income as possible. Just like with investments, it's always best to diversify your income streams for less risk and more success. Having multiple income streams not only provides financial security as losing one doesn't leave you with nothing, but it also allows for a greater chance of building wealth.

Having income that you don't have to spend a set number of hours to get means you can make more in less time or make a lot over a long period of time without much active participation. Once you have multiple streams of income, it should also be easier to save money faster and put more into investments. Since increasing the initial investment can cause an exponential increase in returns, the ability to make this one change can change your entire financial future as well!