Income. Everyone’s favourite word! The first thing most people might think of is a paycheque. However, this is not the only way to gain income.
Today, there are many different and unique ways to build your finances. Understanding how each income stream works is the key to diversifying your wealth and can help you to pick the best ways to supplement your main source of revenue.
What is income
So what is income exactly? Again, most people might just say that it is the money that they earn from work. And they would be exactly right…, kind of. Income is basically the money that a person or business receives in exchange for their labour, product, or investment.
It goes without saying that your paycheck may be the first source of income that comes to mind. However as mentioned previously, there are many different types and sources of income out there. Some examples include:
- Getting paid to do a commission
- Selling goods and services for profit
- Earning money through investments
- Withdrawing your pension after retirement
- Even winning prizes and receiving gifts can be considered income
Most forms of income are likely to be subjected to taxation, which can decrease the actual amount of money that you can keep and use. So it is a good idea to always keep track of how much of your income is taxable. If you are not sure how to proceed, checkout iMoney’s personal income tax guide.
Why knowing types of income is important
Understanding the types of income can help you make informed decisions, have a better idea of what investment opportunities are best suited to your needs, and plan for a financially stable future.
If you are looking for alternative means to reaching your financial goals, understanding the different types of income can help you chart your road map.
Types of income
While there are many different types of income, they generally fall into three broad categories. These categories are: earned income, investment income, and passive income.
Earned income
Earned income is as simple as it sounds. It is the money you earn by working either for yourself or someone else, or through a business you own. Sometimes it is also called “active income” because you actively work for it. Some examples of earned income include working for a company, working side gigs, and freelance work.
Earned income could also include bonuses and extra pay. For example, those who work in sales can earn commissions from each sale, which also counts as income.
Gigs and side hustles can be another option for earning income. These side hustles are often temporary or short-term jobs performing a single task on demand. You can easily find many examples of gig work online on freelance websites. There you can obtain many services ranging from musicians, programmers, freelance writers, babysitters, food delivery drivers, and many more.
Passive income
Unlike earned income, passive income is money that you receive from things that you own, but do not sell.
A good example of this would be silent investors. This is when you invest in a business without participating in its operation or development. Despite having no hand in how the company performs, you still gain some money passively.
Passive income streams typically require an upfront investment and time to grow and maintain profit. Investments such as these can provide you with a regular source of income in the future with little or no input on your part. Other examples of passive income can include renting property or equipment, becoming a part owner of a business, or even receiving dividends from stocks.
Investment income
At first glance, investment income and passive income might look the same, but it is actually quite different. Passive income is money that you gain from something that you own, but not sell. Investment income is money that you gain for selling something that you own for a higher price than you got it for.
This usually applies to things such as stocks and real estate. However, it can also apply to collectibles such as old paper currency, collectible cards, or even some valuable antiques that you happen to find in your storage. In addition to this, the sale of a business typically counts as investment income as well, as long as you made a profit on the sale.
While income certainly is taxable in Malaysia, according to the Malaysian Income Tax Act 1967, the government does not impose a tax on any profits or gains deriving from any price increase when you sell a stock. So keep that in mind when you are thinking of selling.
Income for different stages of life
Different types of income have very different characteristics. Be that as it may, each type of income is well suited to different stages of life. Though it may vary from person to person, earned income is where most will start off, before expanding into investment and passive income later in life once enough savings have been earned.
A good understanding of these sources of income is important to increase one’s wealth over their lifetime and ensuring that they have enough to meet their financial goals.
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