Financial Education (US)

The three types of income: learn more about them!

Know how you can ake more money without working any harder just by understanding the three types of income. Do you want to see how?

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by Thais Daou

Published on 08/17/2021
Learn more about the three types of income. Source: Unsplash
Learn more about the three types of income. Source: Unsplash

If you have a job, then we take that will have already heard the word income. But do you know what the definition of income is? Moreover, do you know why it is important that you understand this, as well as understand the types of income that you can receive?

To summarize its definition, we can say that income is an amount of money that an individual receives, but not necessarily because s/he worked. As a matter of fact, we can broaden its meaning and say that a business can also receive income. Actually, any business needs to receive income. Otherwise, it goes bankrupt.

We can say that income is obtained as follows: an individual, or a corporation, obtains income in the form of money or the equivalent value in exchange for delivering a good or service or by investing capital. Yes, income may also come in the form of investments.

This is why you can invest any amount and receive a larger amount back when you didn’t even work for it. Sounds perfect, right? But the objective of this article is to, first, help you to know everything you should know about income. Then, and only then, we can move forward and talk about investments. Shall we?

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Discover everything about the types of income

As mentioned before, income is the money received by an individual or an organization in exchange for labor, the production of a good or service, or the investment of capital. Concerning its sources, wages and salaries are the most common sources of income for most people.

And why you should discover everything about income and its types? Well, it is critical to understand the various sorts of income in order to set financial objectives for the future and make the most of your money.

Understanding the various sorts of income will assist you in achieving your goals if you are looking for alternative ways to create money over a long period of time. Therefore, knowing the various types of income will assist you in making informed decisions, exploring investment options, and planning for a financially secure future.

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What is income and its types?

Do you know what are the types of income? Source: Unsplash
Do you know what are the types of income? Source: Unsplash

Moving on to the types of income, we present next what you should know.

There are numerous methods for obtaining income. Some you must work for, while others require no effort on your part. Real examples of these types of money sources are: sales, management positions, and construction work are examples of active income; being a shareholder or purchasing dividends are examples of portfolio income; and renting a property or selling a product using a blog are examples of passive income.

Plus, knowing the various types of income might be beneficial because: you can make money from your interests and passions; or invest in causes that you care about; you can put money aside for retirement; or pay off your education loans; and you can even create your own small business and gain confidence in your financial future, and, if everything goes well, or is going well, you can also look for small-business partners.

Also, having that extra cash can help you support your family or start transitioning out of full-time employment and accumulating money over time.

How is income calculated?

Wages are the term used in employment law to describe what you receive. A documented statement of particulars should clarify how your earnings are calculated. You should receive it when or before you start at your job,

Wages include the fundamental rate of compensation as well as the majority of other monetary factors. For example, overtime, bonuses, and commission. An employer can pay you an annual salary, which s/he can do it monthly. Or, if you work on hourly wages, s/he can pay you at weekly intervals.

Your basic wage must be at least at the same level as the National Minimum Wage, before any supplements. In addition, it is important that you know that the government taxes the majority of sources of income.

What are the 3 types of income?

Discover how the types of income are calculated. Source: Unsplash
Discover how the types of income are calculated. Source: Unsplash

Earned income

Wages

This means the money that you receive from a job where your employer pays an hourly fee in exchange for your performance. You make more money if you work more hours.

Salary

This means the money that you make by working, which is similar to wages. Annual salaries are normally determined by a contract and paid weekly, biweekly, or monthly. Typically, the pay is consistent, and you will not be compensated for additional hours worked.

Commission

This means that, when you complete an activity, you earn money. This occurs regularly with salespersons. For each sale you make, you may receive a fixed sum or a percentage of the sale price. A commission is based on the results rather than the amount of time spent working.

Passive income

Selling something old or handmade

Selling items you manufacture, your talents as a service, or items you own but no longer want are all viable options for generating income.

Receiving presents

Nowadays, it is very common to receive cash presents.

Receiving pocket money

It is common for parents to give money to their children on a regular basis.

Receiving government aid

Depending on your circumstances, the government may see you as eligible for aid payments.

Portfolio income

Interests

When you deposit money in your bank account, your money can earn interest for you.

Capital gain

This means the profit you make when you sell an investment for a higher price than the price being asked when you purchased it. It is calculated using the following formula: selling price – purchase price = capital gain.

Now that you have learned a lot about types of income, you can benefit from the various ways of making money more confidently. So, don’t miss out on our tips on how to take care of what you earn as well! See you then.

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About the author

Thais Daou

Thais Daou holds an undergraduate degree in Languages — Translating and Interpreting from the São Judas Tadeu University. She has been translating, proofreading, and transcribing financial documents, as well as documents from other fields, for five years. And now she begins a new chapter in her career, writing about financial solutions in a simplified way, with a desire to spread this knowledge, which is so important.

Reviewed by

Aline Barbosa

Senior Editor

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