The 7 Income Types

There are many crucial aspects to personal finance, and improving your financial situation.

But, there isn’t one factor with greater upside potential than increasing your income.

Sure, what you do with your money is important, but having a larger income will give you more options than a smaller one.

I’m going to walk you through the 7 core types of income, and how you can start to go about opening up multiple streams of income today.

Earned Income

Earned income refers to money that you get by exchanging your time.

The most common example is your salary, and for a lot of people, this is the only income stream you have.

That’s fine, but it doesn’t mean you can’t still take some action to try to grow this income stream:

• Upskill — gain more skills, or become more qualified to increase your salary.

• Work for promotion — work overtime or take on additional responsibilities within your current place of work to raise your salary.

• Job hopping — Switching places of work every few years to boost your salary significantly over time.

Profit Income

Profit income refers to income made via starting a business, in the form of profit.

This is the income stream that has the highest potential ROI, so I’d recommend you to start here if you have time you’re willing to invest.

There are a ton of ways that you can do this, but the main idea is that you create a product, or provide a service, and sell it for a larger amount than what you made it for.

Examples:

• Writing a 20-page eBook which helps people solve a problem, and selling it for $10.

• Creating an agency and selling a B2B or B2C service for a monthly fee.

• Launching a clothing brand, and opening up an online store to sell globally.

Rental Income

Rental income is a recurring income you can generate by owning real estate, and renting properties out to tenants who will pay you monthly rent.

The barriers to entry are way higher for rental income, than any of the other income streams here, but it can be lucrative.

Real estate has been used by millions of investors to build generational wealth, and here are some ways you can get started.

• Buying outright — sure, the barriers to entry are high, but you’d be taking home potentially 4 figures every month through rental income.

• Buy to let — getting a mortgage on a property you wish to rent out, and banking a small profit by charging more for the rent than the mortgage payments. Will be quite hard to do given the current mortgage rates.

• REITs — join forces with a group of investors to invest into a Real Estate Investment Trust, and buy a property together, sharing the equity and the income relative to the investment you’ve put in.

Dividend Income

Similar to rental income, dividends are received by being a shareholder in a company that issues monthly or quarterly dividends.

Not all companies issue dividends, so it’s worth checking before you invest, but dividend income is the ultimate form of passive income.

A dividend yield is shown as a percentage, which equates to the amount you’ll receive per share, per year.

So, if you buy a share of a company for $100, with a 3% yield, you’ll earn $3 per year from the share.

Capital Gains Income

Capital gains is the term used for owning assets that appreciate in value, and selling them for a profit.

Unlike dividends where assets provide you with an income, capital gains income provides you with greater value.

This can be done in a number of different asset classes:

• Stocks — it can be risky investing in individual stocks, but growth stocks like Apple, Meta and Tesla have given huge returns back to investors over the past decade.

• ETFs — a less risky version of stocks, which allows you to invest into a fund which tracks a range of funds. The best example is the S&P 500, which tracks the 500 largest US stocks all at once, netting investors an average annual return of 8–10%.

• Real estate — as well as rental income, you can buy real estate with the aim of growing your wealth by looking for areas that might increase in demand over time, making your investment(s) more valuable.

Interest Income

Interest is like capital gains income, except instead of assets, you’re earning on cash.

Now, I’m not a big fan of holding large amounts of fiat currency, and I’m certainly now a big fan of using cash to build wealth.

Why? Inflation.

But, it’s still a solid option if cash is your preferred option, or if you have cash sitting around in the form of an emergency fund.

It’s always worth shopping around to find the best interest yields available to you, especially in a time where interest rates are higher than they have been for some time.

It won’t last long, but take advantage of it, especially if you prefer being cash heavy.

Royalty Income

Royalty income is by far the least common income stream here, but it’s still worth a mention in case it’s relevant to you.

The best example to use would be music…

You create something, or own something (like a trademark) and receive royalty payments every time someone or something uses what you own, via royalty payments.

If you’ve seen Dragons Den, or Shark Tank, you’ll hear this term used during negotiations, when a Dragon/Shark requests a royalty payment (typically around 3–5%) of each unit sold, until their money is paid back.

There are a few common examples that you could dive into:

• Making music — earning royalties via streaming platforms & sales.

• Writing a book — publishing a book and earning a royalty for each copy sold.

• Patents or trademarks — earning a royalty by owning the rights to a phrase, name or piece of technology etc. that others want to use.

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