" Our incomes are like our shoes; if too small, they gall and pinch us; but if too large, they cause us to stumble and to trip "
John Locke
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1- Earned Income
Earned income refers to the money received as a result of work or services performed. This type of income is a primary source of revenue for many individuals and can come from various forms of employment or self-employment.
1. Wages and Salaries : This includes payments received for work performed as an employee, which can be hourly wages or fixed salaries. It may also encompass bonuses, commissions, and other special payments related to employment .
2. Self-Employment Income : Individuals who operate their own businesses or work as freelancers earn income through their efforts. This includes net earnings from self-employment, which is calculated as gross income minus allowable business deductions .
3. Farm Income : Earnings from farming activities are considered earned income when the individual or their spouse actively participates in the farming business .
4. Payments for Services : This can include payments received for work performed in sheltered workshops or work activity centers, where individuals may receive compensation as part of rehabilitation or support programs .
5. Royalties and Honoraria : Certain royalties from publications or honoraria for services rendered can also be classified as earned income, provided they are connected to active work efforts .
6. Tips : In service industries, such as hospitality or food service, tips received by employees are considered earned income .
2- Portfolio Income
Portfolio income refers to the income generated from investments rather than from active work. It typically includes interest, dividends, capital gains, and sometimes royalties. This type of income is considered passive, as it is earned without the need for active participation in the investment process.
1. Interest Income : This is earned from various debt securities, such as bonds, savings accounts, and certificates of deposit (CDs). For example, if you invest in a bond that pays a fixed interest rate, the payments you receive are classified as interest income.
2. Dividend Income : This comes from owning shares in companies that distribute a portion of their profits to shareholders. Dividends can be paid in cash or additional shares and are typically issued on a regular basis, such as quarterly.
3. Capital Gains : These are profits realized from selling an investment for more than its purchase price. For instance, if you buy a stock for $50 and sell it for $70, the $20 profit is considered a capital gain.
4. Royalties : Although less common in the context of portfolio income, royalties from intellectual property or natural resources can also fall under this category.
3- Passive income
Passive income refers to earnings generated with minimal ongoing effort or direct involvement after the initial setup. This income stream allows individuals to earn money while focusing on other activities or maintaining their current jobs.
- Rental Income : Earnings from leasing property, such as residential or commercial real estate.
- Dividends : Payments received from owning shares in dividend-paying stocks or mutual funds.
- Interest from Investments : Income generated from bonds, savings accounts, or other interest-bearing financial products.
- Royalties : Earnings from intellectual property, such as books, music, or patents.
- Online Ventures : Income from blogging, affiliate marketing, or selling digital products, which can generate revenue through advertising or sales without constant oversight.