The 3 types of income streams

If 2020 and its revelations have taught us anything, it’s probably that we shouldn’t just rely on one source of income. In fact, having multiple streams of income may just be the way forward. After all, it’s no coincidence that on average, millionaires have at least 7 different streams of income. 

Often, we rely on one source of income and so for some of us, it only just gets us by. By the time we’ve covered our living costs, we’re left with little to no money to invest or save for the future.

Having multiple income streams helps you to avoid the paycheck cycle, reach your financial goals, such as paying off debt and building your savings, faster, and feel more in control of your finances. With the risk of unemployment and the gradual rising of living costs, being dependent on just one income could have you feel constantly anxious and uncertain about the future.

So now that we’ve covered why you need multiple streams of income, here’s a breakdown of the 3 main types of income streams:

Active income

Also known as earned income, active income is the most common type of income. It’s when you exchange your time for money. Take your job, for example, it’s earned income because you work a set amount of hours for your pay.

This also goes for if you have side hustles, your own business that you have to put your time into (though eventually, your business could generate you passive income), or perhaps you’re a freelancer providing a service.

 For anything that you have to trade in your time for money, it’s active income. 

Capital gains income 

Capital gains income, or portfolio income, is the money you make from buying and selling, usually through investments. A prime example of this would be if you bought a stock in the stock market for a lower price, say £1,000, and you sell it for £2,000, you would have made £1,000 in capital gains income.

A simple way to look at it is by seeing capital gains as the profit you make from selling something at a higher price than you bought it for.

Passive income

Passive income is a term that has become quite popular and rightly so. It’s when you earn income from your assets or with little to even no effort, so you could practically be making money in your sleep (the dream, right?).

Whilst there are certainly passive income streams that require you to do nothing such as earning interest on your savings or earning cash from switching bank accounts, most passive incomes are never truly passive from start to finish. Many passive incomes often require a lot of work or capital upfront. For example, to earn rental income you would’ve had to put down capital to buy the property in the first place, and even then you sometimes have to trade your time maintaining the property and keeping up with tenants!

More examples of passive income include receiving dividends, affiliate marketing, or if you’ve built an established business that now makes you money with minimum effort.

Whilst earning multiple income streams may not be an overnight fix, it’s something to keep in mind as you embark on your journey to building wealth. The more income streams you have, the more cash flow it will generate so that you can have your money work for you. 

The following is for general information and is not intended as a form of financial advice by Finndon or its representatives, nor the information intended to be relied upon by individuals in making any financial decisions.