The Basics of Three Types of Income: Active, Passive, and Portfolio
Financial freedom requires the attainment of multiple streams of income. With the myriad of different ways that an income can be earned, it can be helpful to break broad economic terms down into understandable and accessible pieces. In this article, we will focus on the three most common types of income sources: active, passive, and portfolio income.
What is Active Income?
Active income is the number one source of income for most people. It is income earned from an active and direct exchange of either money or services for a given period of time. Active income can come in the form of wages, salaries, tips, commissions, and bonuses, and is often connected to the industry and field of employment. Earnings from any full-time or part-time job usually fall into this category.
What is Passive Income?
Passive income is income earned without actively taking part in the process of earning the money. Passive income is money that is acquired through limited to no actions taken by the recipient. A few common examples of passive income include rental properties, investing in the stock market, annuities, royalties, and dividends.
What is Portfolio Income?
Portfolio income is income generated from investments that have a higher risk factor than passive income. Compared to passive income, portfolio income requires more risk but can also produce higher returns. One of the main ways to create portfolio income is through short-term and long-term investing in stocks.
The Pros and Cons of Each Type of Income
Active Income
Pros:
- Easy to start generating income quickly
- High reward for effort put in to start
- Great option for people who want control over their hours
Cons:
- Generally lower returns compared to other types of income
- Highly dependent on conditions of economy
- Can be unstable due to changes in industries
Passive Income
Pros:
- Low time demands
- Generates a steady flow of income
- Option to diversify income by diversifying investments
Cons:
- Generally requires upfront investments
- Takes a large chunk of profits
- Can be difficult to predict expected ROI
Portfolio Income
Pros:
- Can be highly rewarding
- Opportunity to diversify investments
- Generates appropriate income depending on level of risk taken
Cons:
- Higher risk than passive income
- Can require more time and effort to maintain
- Can be unreliable depending on market conditions
Thoughts
Active, passive, and portfolio income are all important tools to achieving financial freedom. As with any investment or career change, it is always important to weigh the pros and cons and thoroughly do your research before committing to any of these avenues. As you begin your journey to financial freedom, understanding the different ways in which income can be earned can help you determine which route is best for you.
