If you ask some people, they will tell you that the key to success is hard work. Other folks might say it is nothing but luck. Those who truly know will point to one thing and one thing alone. You have to have a firm understanding of money and how it works.
In other words, you need to know how to make money to have a lot of it. Makes sense when you think about it, right?
Unfortunately, many people know absolutely nothing about managing their personal finances let alone how to make even more money beyond just what a paycheck brings in periodically.
In this article, we’re going to explain the seven streams of income, what they are and how they work, as well as draw attention to how you can take advantage of these avenues for making money to help yourself lead a richer, more financially secure life.
Earned income is the money you make from a job, typically in the form of a paycheck. Your paycheck can be based upon an hourly rate, commission, or some combination of those two or even a salary. This is the form of income that most everyone out there is familiar with and that most of us utilize.
In fact, it is the primary source of income for the vast majority of people out there. Earned income can also relate to self-employment though, typically, it is more often associated with drawing a paycheck. At its most basic level, earned income means the money you make from performing a job at a certain rate or wage based upon either a contractual, perpetual, or one-time agreement.
Profit (from a Self-Owned Business)
If you own a small business any profit that you make from that is an income stream. This business could be something simple like running a blog and collecting ad revenue or something more complex like consulting services. Heck, it could even be money that you make with an eBay store.
Whatever your business type, the profit drawn from that comes to the owner in a form of income that is not contingent upon an employment agreement of any type. The best way to distinguish this type of income from “earned” income is that profits from a small business typically empower people to be their own “boss.” In other words, you sign your own paycheck when you take profits from a business you own.
Interest-bearing accounts like savings accounts and certificates of deposit are both a form of income as well as a type of passive income. Passive income designates the way in which it is earned. When it comes to money, passive means that the person receiving the money in the form of dividends and interest payments did nothing other than allow another person or institution to hold that money.
This applies to savings accounts and other bank instruments as well as securities like stocks. Investors who move enough money into “passive” income vehicles can often find themselves making more passive income than active income - an ideal situation to say the least.
These are similar to interest-bearing accounts in that they are a form of passive investment, but the major difference here is the level of risk involved. In essence, both the principal amount put forward to purchase stock can go up and down as well as any dividend it might pay. While the amount of interest paid on a savings account can fluctuate, most governments around the world provide a kind of insurance to depositors in case the bank goes out of business. This means that most people retain the full amount of money that they put into the bank.
The stock market never operates like this. In fact, the amount of money put forward by an investor can go to zero in a heartbeat. Yet there is an upside. As the old saying goes, there is a definite floor at a $0 valuation, but the sky is the limit for the upper number. In other words, stocks can theoretically go up in value forever as long as demand keeps increasing. This is how small investments can become huge fortunes - and all without any active involvement on the part of the investor.
Owning rental properties cannot be classified as passive income though some people often make that mistake. The reason for this is that they often become a job in and of themselves to manage - whether by yourself or with a team of people. Related to the profit income stream discussed above, rental properties are not hard to understand from a money-making standpoint. You purchase properties and rent them out to tenants.
The money you take in from tenants less any loan expenses, maintenance expenses, insurance, taxes, and other associated costs is your rental income. A simple concept in theory, rental properties can often become one of the more complex ways to make your money work for you. But, for those people who enjoy being their own boss, rental properties are an ideal way to meet a market need and create a stable income stream.
Often associated with stocks and investments, capital gains refers only to the process of selling an item for more than you paid for it - or even less, which is called a loss. At its heart, capital gains is the essence of trading. When a trader purchases a certain item from one seller at a certain price, then sells that same item to a buyer at a higher price, the difference between the price the second seller paid and the price the buyer pays to that same seller are known as the capital gains.
The process of making money from this difference is known as arbitrage. Sometimes the amount of money made selling an item - stock, widget, house, car, or whatever - is very small but, if done in vast quantities, adds up to huge amounts of cash. This is why some brokerages will buy up shares of stock only to sell them later for a few more cents per share.
Capital gains take many forms but the basic thing to remember is that it is the process of selling an item for more than you paid for it with the difference between the purchase price and the selling price is the gains on your capital.
Royalties are paid to you for work that you completed in the past. This could include a book, song, play, or other types of media that requires a license to use. For example, if you are a skilled photographer, you could put your images up on stock photo websites for licensing to other users. The fees paid to the agency will be shared with you in the form of royalties. This is a passive income vehicle because you are getting paid for work you have already done, sometimes even years before.
Hopefully you have a better understanding of the seven streams of income. Some of them are easier to make than the others, but if you have a plan, you may be able to attain all of them.
How many streams of income do you have?
This is a guest post from Jason Butler. To read all the stories which Jason posts head over to his website, My Money Chronicles. He can also be found on Facebook at My Money Chronicles and Twitter at Money_Chronicles, and he also runs his own FB Group of My Money Chronicles - The Inner Circle.
Here are other blogs on starting a small business and side hustles
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