Income is money you receive for doing a job as an individual or providing goods or service as a business or investment.
Income can be a paycheck from your job, payment from service you provide as a self employee, or dividend from your portfolio; a payment from rental property, bonus, or tips.
Without income, you can’t hope to have a good quality of life in this time and age.
How often you receive income depends on the type of job you do. If you are an employee, you can receive income weekly, biweekly or monthly or other time line set by your employer. If you are self employee, it depends on how fast you find and complete jobs and or the contraction agreement.
However, not all income is created equal.
The 3 types of income
Although, there are many sources of income, there are three types of income define by the IRS. Each functions differently in nature, and they have different tax implication.
The three types of income are activity income or earn income , passive income, and portfolio income.
1 Active income
Activity income or earned income is receive for exchanging labor at a job, or providing goods and services as a business. Majority of people live under the earned income or W2, and self employed or 1099.
The main quatria for earned income is that earn income requires physical engagement —your time and energy.
2. Passive income
Passive income is quite the opposite. It defies the nature and concept of earned income. Passive income does not required engagement to receive payment.
It’s income you set and it generates cash on auto pilot or with minimum time and attention. A great example is a rental property. You don’t have to physically go invest your time and energy on those properties to receive the rental income.
3 Portfolio Income
Portofoli income is income generate from paper investments like capital gains, dividend, and interest income that you might receive from ownership of stocks and bonds.Portfolio income is similar to passive income in that it can be set on auto pilot.
How taxes affect the Income types
The Internal Revenue Tax Income differently. For instance, activity income or W2 is general taxed at 40% tax rate wheaten you’re a line worker or a CEO.
Passive income could differ depending on the source of income. In some cases, you might have a greater tax break, hinge, pay less in taxes. Talk to you tax professional.
The superior income strategy
Tax is one way to differentiate the types of income. But even beyond taxes is one income that provides more benefits than the other two: Passive income.
Passive income should be pursued because it offers unmatched benefit. Passive income provides income with great tax rate and persevere your most value asset — time.
It’s the epitome of freedom — Financial freedom.
Your Wages Doesn’t Determines your Wealth
How much you make doesn’t determine your wealth. It’s how you manage your income. For example, if you make 10k a month and spend 10k a month, you’re no different than someone making 3k and spending 3k.
You are both living paycheck to paycheck. And you are no closer to financial independence then they. However if you are if subsentual amount is going to invest or other assets, then bigger is better.
How you manage your money
Passive income gives you the ability to end the misery.