Explore 3 types of income streams that can change your finances. Learn about earned, passive, and portfolio income with unique insights and practical tips.

Let’s step into a story. Meet Joy, a single mother of two navigating the bustling streets of Chicago with multiple jobs to make ends meet. While tucking her kids into bed one evening, she stumbled upon an article about income streams. Intrigued, she pondered if a side income could bring stability and freedom. This revelation transformed her life, igniting a passion to share her newfound knowledge with others.

In today’s evolving economy, understanding the types of income streams is crucial. According to a recent United States Census Bureau study, the median household income in the US is $67,521. Relying on a single income source carries significant financial risks. Diversifying your income can provide a safety net and open new growth opportunities. There are three primary types of income: earned, passive, and portfolio income. Each type has unique traits and benefits, so we must explore all options, empowering ourselves with practical knowledge.

Earned income is the most common type. It comes from active work, like a full-time job or freelance gigs. Passive income includes earnings from investments. These include rental properties and dividend stocks. They require minimal effort to maintain. Portfolio income originates from stock, bond, and financial instrument investments. Using these different income streams, you can build a better, safer financial future.

The 3 Different Types of Income Streams

Being paid every month or day, come rain or shine, sounds incredible, right? It all depends on the different types of income streams you create to achieve this kind of goal.

As a child, I played Monopoly® with my family and friends. And I still play the game as an adult.

We played for hours, exchanging four greenhouses for one red hotel.

Buried in that simple formula. It was a powerful lesson that has served me well throughout my adult life: the value of cash flow.

Monopoly® is a game that teaches you how to create positive cash flow. You buy a property and collect rent when someone lands on your property.

You enhance property value and sell for profit, mimicking real-life transactions.

You switch to more significant properties, boost cash flow, and diversify your portfolio.

I learned about cash flow at an early age by playing Monopoly®. Unfortunately, most people, including myself, never learned the lesson of cash flow.

Even with what we learned, we still needed to implement the game in our real lives.

Because I am an honorary daughter of Robert Kiyosaki’s Rich Dad, Poor Dad family…

My rich dad’s lessons are about the three types of income and the cash flow advantages of passive income. They have allowed me to make money in a new way. It is different from the methods of those who follow traditional advice.

Most people recommend going to school, getting a secure job, and investing in a mix of stocks, bonds, and mutual funds.

By creating cash flow, I will become a multimillionaire. One key reason I will become wealthy is my understanding of the three types of income and their link to cash flow.

Let’s take a look…

The 3 Types of Income

Income Type #1 – Earned Income

If you have a job and receive a paycheck, you make money through earned income.

To reference the CASHFLOW® Quadrant, Employees (E) and Self-employed (S) people. Those on the left side of the quadrant make money through earned income.

Examples of earned income.
When you earn money through a paycheck, you exchange time for money. As an employee, web designer, cashier, or police officer, your job pays a set amount (X) for a specific time (Y).

Here in the U.S., the employee and employer negotiate the amount of money. An employee must work 40 hours per week as a full-time rule.

The advantages of earned income.

• Earned income is a viable choice for those with a low financial IQ.
• The formula is straightforward. I’ll do X job, and you’ll pay me Y money.
• You can expect a steady monthly income if the economy is stable and you do your job well.
• You may get a raise and even more money in your pocket if you do an outstanding job.

Almost everyone thinks a high-paying job is the most secure thing you can have. My wealthy father held a contrasting view, and I share it.

Here is why…

The disadvantages of earned income.

• Many people earn enough to cover their monthly expenses. So, they need more money to invest.
• For most Es and Ss, the saying, “Living paycheck to paycheck,” explains their status. Suppose they want to make more money. They need to work more hours at their full-time job through a part-time job or as a freelancer.
• Income stability remains essential for all employees, regardless of salary levels. A crash of the economy, mismanagement, or another pandemic could cost you your job.

Unfortunately, millions learned this during the COVID crisis. We need to restore many of those jobs. Earned income is subject to the heaviest taxation. I will discuss this further later.

Income Type #2 – Portfolio Income

When you exchange time for money, you earn income. Investors earn portfolio income through capital gains.

Examples of portfolio income

• When someone buys stock in a corporation at a given price, they plan to sell it at a higher price.

So, if they buy a stock at $10 today, and the price goes up to $40 when they sell it, they make $30 in capital gains. That capital gain is their profit.

• Another example of portfolio income is house flipping.

You buy a run-down home in a nice neighborhood. Invest a lot of money upfront to improve it, and then hope you can sell it at a high enough price to make a nice profit.

Stock traders generate profits by buying underpriced shares of companies. When prices rise, they can sell those stocks for capital gains.

The advantages of portfolio income.

• Portfolio income can make you money in a short amount of time. Buying low and selling high is easy when the economy is on fire.
• Or, if you have insider information like day traders on Reddit who pushed up the price of GameStop a while back. You can get on the inside track of a rocket ship.

The disadvantages of portfolio income.

• It’s tough for even the best investors to make money with portfolio income. It’s too speculative.
• As such, it can be unsafe, especially for those with a low financial IQ and for those who follow the herd.
• If you enter late in the game, those who raise the price can massacre you… as many folks did with GameStop.
• Portfolio income is also at the mercy of the economy.

Many people were flipping houses in 2008. It was a rude awakening when the entire housing market collapsed overnight. Because a home is a slow liquidity asset… most couldn’t sell in time to recover their losses.

Like earned income, you pay high taxes on portfolio income, even on profits.

Income Type #3 – Passive Income

As mentioned, my rich dad used a Monopoly formula: “Four greenhouses, one red hotel.” This formula shows how to make passive income, the third type of income.

It again referenced the CASHFLOW Quadrant. It concerns those on the right side: Business Owners (B) and Investors (I). These people make money by acquiring assets that provide consistent cash flow.

In Robert’s book, “Rich Dad Poor Dad,” he explains in greater detail what defines an asset. An asset puts money in your pocket, regardless of whether you work.

Examples of passive income.

Sophisticated investors invest for passive income.

• Examples of passive income are rental properties. They pay you cash flow through rent, like in Monopoly.
• It is owning a profitable business or creating a product like a book or a game. That pays you money each month in the form of royalties or subscriptions.

Advantages of passive income.

• The best advantage of passive income. Once you have an asset, it provides cash flow regardless of your work.
• Money keeps coming into your pocket. And you’re free to do other things… like finding more cash-flowing assets.
• Even better, the profits from cash-flowing assets. You can use it to acquire more assets that generate cash flow.
• And unlike portfolio income, you still own the original asset. Even if you use the cash flow profit to buy more cash-flowing assets, it’s a compounding effect.
• Passive income is the lowest taxed income. It’s almost as if the government wants you to invest this way.

Disadvantages of passive income.

• It takes a high financial IQ and patience to invest for passive income, two things most people lack.

Most people have a low financial IQ. It’s not their fault. But, someone told them to attend school, get a job, and invest in the stock market. They also said that their house was an asset. The belief was that your house always goes up in value.

Only in 2008 did everyone realize that the belief wasn’t true.

Some people saw the value of their homes cut in half overnight. These homeowners realized that their home wasn’t an asset but a liability.

Where an asset puts money in your pocket, a liability takes money out.

Again, let’s consider your home. Even if you own your house, you still have upkeep, property taxes, and utilities. If your house were an asset, it would make money for you, not take money from you.

Now that you have a basic understanding of the three types of income. It’s time to understand how each affects your most significant expense: taxes.

Most people earn a living from ordinary income. So, they view themselves as poor or middle-class.

Most people label themselves as poor or middle class. It’s not about how much money they make but how much they keep.

The most significant expense for an E or S on the left side of the CASHFLOW® quadrant isn’t their mortgage, car payment, or credit card bill. For those who earn a living, taxes are their most considerable expense.

People who earn income through a job (either as an employee or a sole proprietor/small business owner). They lose roughly 50% of their money through taxes.

Earned income is the most taxed of all three types of payment.

Making money through portfolio income will also save you little on your taxes. You will pay about 20% tax on your stock or real estate sales, regardless of how much you make.

Using the previous example about buying and selling stocks (in the portfolio section). Buying 1,000 shares of stock at $10 and selling the shares for $40 will make $30,000 in profit.

Buy 10,000 shares @ $10 = $10,000

Sell 10,000 shares @ $40 = $40,000

Profit = $30,000

However, once you deduct 20% of taxes from the top, you will have $24,000 remaining.

Picture earning a fortune while paying no taxes legally.

When you invest in your financial education and start earning passive income. You’ll know how to achieve this without a job and pay fewer taxes.

The tax code explains why the tax rate on passive income is lower than that on earned and portfolio income.

I will keep the details. Yet, it’s worth noting that the government benefits those who create jobs—B’s and I’s.

The more jobs are required, the more workers will need to fill them. The more people work, the more the government can collect taxes.

In Conclusion

You need to know the three types of income: earned, portfolio, and passive. Also, you need to understand how taxes affect each one.

I’m not implying that one is better than the other. I aim to educate you on the different income options available.

I’m also not here to tell you which of the three types of income you should spend your time acquiring. That’s a personal decision.

Are you happy collecting small deals (greenhouses), or are you playing to win (playing for big deals)?

How you answer that question might hold the key to which type of income is right for you.

Read the NY Times’ renowned Rich Dad Poor Dad by author Robert Kiyosaki.

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Knowing the three income streams can impact your finances. Earned, passive, and portfolio income are sources of income. Diversifying your income can lead to a more stable and prosperous future.

Whether starting your financial journey or seeking more income, explore all options. Find what works best for you. Remember, economic freedom is not about earning more. It’s also about making your money work for you.

To control your financial future, please buy my eBook, Money Attracting Affirmations. It promises to transform your life with insights from economic and business giants. This book aims to boost your income. It offers affirmations and insights from financial and business giants.

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