Income is how your finances stay afloat. Without money rolling into your bank accounts, it is impossible to keep up with all the costs that life throws your way.
Generally, it’s a good idea to have multiple streams of income so that you won’t be left scrambling to pay your bills if one disappears.
But what are the various types of income streams, and how can they help you achieve financial independence? We’ve identified the different income stream options to help you improve your finances and find ways to add extra money to your wallet.
Table of Contents
- Active vs. Passive Income
- 8 Types of Income Streams
Active vs. Passive Income
Before evaluating the various types of income, it’s important to understand the difference between active and passive income.
Active income involves performing tasks that involve direct work in exchange for money. When you earn active income, you are essentially trading your time for money.
In contrast, passive income involves earning money that isn’t directly tied to your time. Of course, there is still some work involved with this kind of income. However, passive income allows you to front-load your work and reap the rewards over time.
For example, freelance writing is an active way to earn money. But writing a book offers a way to earn passive income.
When it comes to which one is better, both forms of income can help you achieve financial stability. However, passive income is typically preferable because it gives you the luxury of time.
If you have multiple passive streams of income, you won’t have to work as much to earn the money you need to pay your bills. Instead, income will just keep rolling in without much effort on your part.
Having passive income is particularly important once you retire. In order to ensure you don’t fully deplete your nest egg, making sure you have passive income can ensure you don’t outlive your money.
That said, if you are still young, having some sources of active income can be beneficial. Active income sources can help you learn skills and strategies to generate passive income.
Plus, you can use your active income stream options to generate passive income through investment income.
8 Types of Income Streams
When researching types of income, there are many different opportunities available. In alphabetical order, here are the main income stream options that can help you build your wealth.
1. Capital Gains Income
Capital gains income occurs when you sell an asset for a profit. It’s one of the most common types of income and is a great way to make money.
For example, let’s say that you purchase a home for $100,000. A few years later, you sell it for $200,000. As a result of that sale, you’ve realized capital gains of $100,000.
You can experience what is called capital gain with almost any type of income. All that’s required for capital gains income is that you sell the asset for more than you bought it for.
Capital gains can be an active or passive way to make money. For example, you could buy a stock and sell it for a capital gain without putting any work into the value of the company.
Alternately, you could buy items to flip (also known as retail arbitrage) to create capital gains income once you sell them.
2. Dividend Income
As a shareholder in a company, you are entitled to a portion of its earnings. Dividend income is a cash payment that shareholders receive from companies when they distribute profits.
In most cases, dividends are paid out on a quarterly basis. If you have enough invested in dividend-producing stocks, you could build a sizable income stream.
When you are looking to get started with dividend investing, the Dividend Aristocrats list is a good place to begin your search. This is a list of large companies with a consistent track record of paying out dividends for 25 years.
However, before you dive in, consider the fact that dividends aren’t a guaranteed payout to investors. Instead, the company can choose to cancel or cut out dividends at any time.
This is because dividends are tied to profits. If a business changes in profitability, that can impact your dividend payment.
After buying the stock, you won’t have to complete any additional activities to get your dividend payment. With that, dividends are a passive form of income.
3. Earned Income
When it comes to different types of income, earned income is an active income stream that involves trading your time for money.
In most cases, earned income comes in the form of a regular job. However, it’s also possible to generate earned income through side hustles and gig work opportunities.
For example, you could earn active income with these side hustles:
- Driving for Uber or Lyft
- Delivering groceries with Instacart
- Walking dogs with Rover.com
- Performing odd jobs around town through TaskRabbit
Additionally, self-employed business owners can receive earned income through their businesses.
Earned income is the most labor-intensive income stream. Almost everyone you know has this kind of income stream in the form of a traditional job.
Although it’s often a major income stream for households across the country, it could also be the least stable opportunity. This is because changing markets dictate layoffs that can eliminate the earned income of thousands of people in one fell swoop.
In addition to being the most common source of income, earned income is also the most heavily taxed. Income taxes can really dilute your earnings. It’s also important that, if you are a gig economy worker, you save money for income taxes.
With that, it’s especially worthwhile to consider building up other sources of income that provide income tax advantages to keep more money in your pocket.
- Connects pet sitters with pet owners
- Schedule and income flexibility
- Guarantee offers support for pet sitters
4. Interest Income
Interest income is a form of passive income. It involves putting your cash into a specialized account that pays interest.
Not all bank accounts offer decent interest income, but some do. For example, high-yield savings accounts and certificates of deposit (CDs) provide a way to put your cash to work for you.
Although you’ll earn some income when the bank pays you interest, it’s usually not a way to maximize your cash’s potential. However, the easy access to interest-bearing accounts makes it a relatively low-risk way to put your money to work for you.
One good strategy to earn interest income is storing your emergency fund in a high-yield savings account.
With this type of account, you’ll have fast access to cash in the event of an emergency, but you also won’t miss out on the opportunity to earn some interest along the way.
If you can get better rates with CDs, you can consider building a CD ladder. With a CD ladder, you put money into different CDs. Each one will have a different period of time associated with it.
This allows you partial access to your money more regularly while also ensuring you get the best rates to grow your wealth.
- An online bank paying up to 4.20%
- $100 minimum
- Doesn't charge ATM fees
5. Profit Income
To generate profit income, you need to have an item that you can sell.
This can be a fun revenue stream for inventors who love coming up with new products to make people’s lives easier or those who enjoy creating crafts that customers want to purchase.
When selling a product, the profit is the difference between your revenue and your expenses. For example, if it takes $10 to create a product and it sells for $25, you’ve created $15 in profit income.
If you want to increase your profit income, there are two strategies to implement. You can either work on reducing the cost to make an item or increase the sale price.
Although both strategies involve some legwork, they could lead to significantly increased profit income.
If you aren’t sure of how to boost your profit income, consider hiring a business expert. Sometimes a fresh pair of eyes can spot easy changes that can result in increased profit income.
6. Rental Income
Depending on the situation, rental income can be a form of passive or active income.
The basic principle of rental income is that you own a property and collect rent from the tenants. But the landscape of investing in real estate is very diverse.
Of course, you could opt for the traditional real estate ownership route. In this case, you would purchase residential or commercial real estate and rent it out to tenants. But, without a property manager, this isn’t entirely passive.
Fortunately, there are other rental income opportunities that provide a more passive way to capitalize on this type of income.
For example, you can invest in a real estate investment trust (REIT) through crowdfunded real estate sites. In this case, the REIT would own multiple properties and potentially generate income by renting out said properties.
After the REIT collects a profit, it distributes the appropriate amount to REIT owners, which includes you. This generates investment income for you.
You could even rent a room in your home on Airbnb to generate rental income.
7. Royalty Income
Royalty income is a form of passive income that involves creating an asset of some kind that generates profits without additional work in the future.
A common example of royalty income is found in the music industry. For example, when a musician records a new song for a record label, the artist receives a royalty payment each time the song is played in a public setting or sold as a download.
The nice thing about royalties is that there is no cap on earning potential. Instead, you can create a unique thing and receive proceeds from its use for the rest of your life.
If you want to get started with royalties, consider working with Royalty Exchange. This marketplace can help you purchase the rights to assets that generate royalty income.
Alternately, you can create your own unique digital media to collect royalties from an asset you’ve created.
8. Windfall Income
Windfall income is perhaps the most fun option on this list. Essentially, it’s when you receive a sum of money from an unexpected source.
A few possible sources of windfall income (which is considered passive income) include bonuses, inheritances and lotto winnings.
When you receive a financial windfall, it’s a rush of excitement. However, instead of rushing out to spend your newfound cash, consider turning it into a more reliable stream of income.
For example, you could invest a windfall in dividend stocks or rental properties to create a more consistent stream of income.
While spending the windfall immediately sounds fun, building lasting financial freedom with another income stream can pay off in the long term.
If you have hopes of becoming a millionaire someday, then definitely consider turning your windfall into a long-lasting income stream.
Do you still have questions about different types of income? These FAQs might be able to help.
Why is it important to have multiple streams of income?
The reality is that life happens. Even if you think your primary stream of income is infallible, you might hit a bump in the road at some point.
Multiple streams of income give your finances more room to breathe. When one income stream disappears, you’ll have other sources that you can use to stay afloat.
What is the most lucrative income stream?
The most lucrative stream of income varies based on your individual income-building strategy and your talents.
For example, an inventor may create a product that generates substantial profit income over time. On the flip side, someone who isn’t quite as creative but has extra money to invest in properties may find rental income to be more lucrative.
Test out different streams of income to determine which is the most lucrative for you. Also, make sure to consider income tax as you evaluate how profitable an income stream can be.
Which income stream is the easiest to maintain?
Passive income is the easiest type of income stream to maintain. Depending on the passive income you create, it could be possible to set it up and forget about it completely.
Which income stream is the most time-intensive to maintain?
Earned income is one of the types of income that takes the most time to maintain. Typically, it includes a full-time or part-time job. It could also include a side hustle.
With these opportunities, you have to set aside time in your day to go earn money. Furthermore, these ways to make money are likely to never become passive.
Different types of income streams involve different levels of work. You’ll have to decide for yourself how many ways to make money are right for your finances.
If you want to build multiple streams of income, try focusing on setting up one income stream at a time. As you develop more ways to make money your financial stability will increase.