Skip to content Your financial well-being is determined by your income level and how you manage your finances. Whether you are poor, struggling or affluent has a lot to do with your level of income and what you do with the money you earn.
To improve and secure your financial fortune, you need to understand the three types of income by which people make money: active income, passive income, and portfolio income. How you handle each of them goes a long way to determine your wealth level.
Active Income
Active income typically requires having a paid job or being self-employed. It is the most common form of income and the primary source of earnings for most individuals and households worldwide.
Active income, also known as earned income is money you receive from direct effort or work you do. It includes earnings from a job or business venture that you actively participate in. Active income comprises salaries, wages, tips, bonuses, commissions, and net earnings from self-employment.
To earn this type of income, you must trade your time and be actively involved in the work, whether by providing a service or labour.
Unsurprisingly, the majority of people start their financial journey with active income. However, the mistake people often make including high-income earners is to confine themselves to only this type of income. Many attain a higher income threshold, and their default reaction is to increase their expenses, particularly on liabilities, instead of prioritizing income diversification above consumption.
To build wealth, you need to generate income from sources beyond just active income.
Passive Income
Passive income is money that you don’t actively work for; it is generated from assets you own, products you have created, or sales systems you have set up.
While active income is earned by directly working in a job or owning a business, passive income is earned without regular labour on an ongoing basis once the initial investment of time and money has been made. However, passive income doesn’t mean you would become passive in your efforts; rather, the time you invested earlier starts to pay off, and you subsequently require less time to maintain the income flow.
Examples of passive income include rental income from properties or storage facilities, dividends, interest from savings, commission from affiliate marketing, and income from digital content such as YouTube videos, online courses, stock photos, and selling an app. Passive income is also generated in the form of royalties which are payments received for the use of one’s intellectual property (IP) or assets. Royalties are earned from music, books, apps and software, movies and TV shows, franchises, minerals, and natural resources among others.
Compared to active income, relatively fewer people have sources of passive income.
Portfolio Income
Portfolio income, also known as investment income, is revenue generated from investments (investment portfolio) including capital gains (profit from selling an asset) and returns from stocks, bonds, currency exchange, and mutual funds.
Having a portfolio income makes you an investor. Unlike active income earned from employment or business activities, portfolio income is based on the assets and securities you own. Similarly, unlike passive income, portfolio income often requires you to constantly make decisions about buying or holding different securities, even when your ultimate decision might be to wait months or years before changing your portfolio selections.
Compared to both active and passive incomes, relatively few people have this type of income stream.
Thank you for stopping by. I’m Ayo Adebamowo. Author, Speaker and Tech Entrepreneur. I’m here to walk your success journey with you. Subscribe to my newsletter for regular nuggets or check out other empowering articles on my blog to help in that journey. My latest book is Make Money, a primer on launching and growing a profitable business.
Written by : Ayo Adebamowo
About the Facilitator – Ayo Adebamowo Ayo Adebamowo is an Author, Speaker and Tech Entrepreneur. He is the founder of MyMedicalBank, a health technology company promoting digital access to healthcare through creating innovative digital solutions.
A Nigerian-British national, Ayo has been named as one of the 70 Most Outstanding Healthcare Professionals in the United Kingdom.
Having started and run various businesses himself in healthcare, technology, agriculture and publishing, Ayo very much understands from a practical point of view the pains, struggles and mistakes aspiring and established business owners often make that delay their success. He therefore brings his wealth of experience coupled with years of experience and research to help other entrepreneurs succeed in their journey.
