What kind of income exists 👉 And how to grow it

An income is any inflow of money into our personal economy.

For example, for many people their main (or even the only) source of income is their salary.

But Did you know that there are other incomes that do not depend on your job?

I mean the famous passive income.

It is a concept that you must know if your goal is to take control of your personal finances and not live chained to a payroll.

And you should not only know what they are, but also how to generate them.

I’m going to talk to you about all that here.

In this article I will explain the main types of income that exist, the differences between them and which ones you should prioritize so that money works for you (and not the other way around).

Let’s go there.

✅ The main types of economic income that exist

Chances are you’ve heard of active and passive income. But that’s only half the picture.

We can actually distinguish two large classes of income:

  • According to its relationship with working time (assets and liabilities).
  • According to the periodicity with which we receive them (fixed and variable).

And to achieve your financial goals, it is essential that you understand how they differ and how they relate to each other.

I start with the first group.

➡️ # 1. According to its relation to working time

Not all income increases linearly with the time we spend working; some can do it exponentially.

Hence the differentiation between active and passive / semi-passive income.

A. Active income

Active income is those that depend directly on working time: the greater the number of hours worked, the greater the income.

The paradigmatic example is the salary.

If we are employed in a company that pays us € 1,000 per month and we want to increase that amount, the only options we have are:

  • Work overtime.
  • Find a second job.

Of course, you could also look for another company where they pay you more or ask for a raise; but in both cases you would continue to exchange your time for money.

And when the only income you receive is assets, the risk is evident:

If for any reason you were forced to stop working (you are fired, suffer a serious illness, etc.), this income would be reduced or even suddenly disappear.

In addition, being tied to working hours, the growth potential of active income is limited (the day only has 24 hours).

Hence the importance of supplementing them with passive income.

B. Passive income

The other side of the coin.

Passive income is those that they do not directly depend on the time you spend generating them.

For example, suppose that right now you are earning € 500 liabilities per month through investments in the stock market (specifically, in shares of companies that pay dividends).

To generate double your income per month (€ 1,000) you would not need to spend twice as much time (8 hours) managing your investments.

The most common way to generate this type of income is precisely through investment (later in this article I will give you some specific ideas).

Note: If you are interested in investing in stocks to generate passive income but you do not have a high knowledge of this area, I recommend that you take a look at my membership “The Dividend Club”, where every month I share the companies in which I myself invest to earn passive income from the stock market.

C. Semi-passive or residual income

Even if you treat them separately, residual income could actually be considered a subtype of liabilities.

The source of this type of income is a job that we do only once, and from there it generates recurring earnings in a passive way.

Think, for example, of writing a book.

Writing and publishing the book itself takes a long time. But once it is being commercialized, you will receive income (in concept of copyright or royalties) for each sale passively.

➡️ # 2. According to its periodicity

We now proceed to classify income according to the regularity with which we receive it.

We have two types:

A. Fixed income

Those money inflows that are repeated periodically.

Again the clearest example is the monthly salary.

But in this group we could also include the rent of an apartment that we have for rent, or the dividends that a company in which we own shares pays us periodically, etc.

B. Variable income

This type of income is the one that is received in a timely manner.

In this group would enter:

  • Sales commissions charged on certain jobs.
  • The incentives or extra payments that some companies pay to all their employees for reaching certain billing goals.
  • Capital gains (you sell a financial asset for a price higher than what you bought it).

We could even include some totally unexpected and anecdotal income, such as the collection of an inheritance.

➡️ # 3. How do these different types of income combine?

If we put together everything we have seen so far, we get four categories:

  1. Fixed assets: the monthly payroll.
  2. Fixed liabilities: dividends, interest on the purchase of bonds, real estate income, etc. (all of them are charged periodically).
  3. Active variables: sales commissions or salary incentives.
  4. Passive variables: capital gains.

And among all of them, the two types of passive income are the ones that will allow you to depend less on your payroll and gain financial stability.

Let’s see how to generate them.

✅ How to start generating passive income and make it grow

Before continuing you must bear this in mind.

Without proper control of your money inflows and outflows, getting more income won’t do you any good.

In fact, among people with a low financial education it is very common that, as their income increases, their expenses do so at the same level.

You earn more, you spend more.

A phenomenon that Robert Kiyosaki, in his famous book Rich Dad, Poor Dad (a highly recommended work whose summary you can read on my blog), calls “the rat race.”

Therefore, before considering earning more money, you must first have your homework done.

➡️ # 1. The first step: create your monthly budget

A budget is a document that helps you keep track of your expenses and income.

That is, it will allow you:

  • Know how much you earn per month and how much money you really need to pay for your standard of living (and thus prevent expenses from increasing as income increases).
  • Determine what percentage of your money you can invest to grow your passive income (or, if you haven’t already, save to create your emergency fund).
  • Detect and eliminate superfluous expenses that you can eliminate, and thus dedicate that money to your investments.

Not to mention that, without a monthly budget, It is impossible to know the health of your finances or make future forecasts.

If you haven’t created yours yet, you can use this monthly budget template that I have designed for The Investment Club followers (and if you want to know more about the importance of having this budget, take a look at this article).

➡️ # 2. Invest in assets that generate passive income

Once you have your expenses and income under control, and as long as you have created your emergency fund, it will be time to take the next step:

Invest in productive assets that generate passive income.

At the beginning, you will most likely have to allocate a part of your active income (a part of your salary or your turnover, if you have your own business) to these investments.

However, as your passive income begins to grow, you can reinvest it to acquire new assets and, thus, grow your profits.

I know this may sound a bit confusing, but in this diagram you will see it more clearly:

types of financial income

Having clarified this, let’s see how to generate passive income, both fixed and variable (and in which cases you should prioritize one or the other).

Important: do not confuse “active income” with “productive assets.” The first are inflows of money that depend on your time. Productive assets, on the other hand, are goods or rights that have a specific economic value. I talk more about the different types of assets here.

A. Fixed passive income

Fixed passive income is those benefits that you receive on a regular basis.

For instance:

  • The interest you receive for acquiring bonds (state or company).
  • Dividends paid to you (quarterly, semi-annually, etc.) by a company whose shares you own.
  • The rent you charge your tenant.

This type of income is very useful to supplement your monthly salary.

Even if you manage them properly, there will come a time when your monthly passive income will exceed your expenses, so you will not be forced to work for a living.

That is, you will have achieved financial freedom.

If you want to know more about financial freedom and how to achieve it, I recommend that you take a look at my book “Investing. Keys to achieving financial freedom ”, where I delve into all the concepts you need to know to start this journey.

B. Variable passive income

The most common way to generate variable passive income is, as I said above, through capital gains.

You invest in a certain financial asset and you wait for it to appreciate to sell it in the future (after months or years) for a price higher than what you paid to buy it.

This strategy can be followed with virtually any type of asset, including:

  • Properties (a common practice is to acquire a property to reform it and resell it).
  • Company shares.
  • Participations in investment funds and ETFs.
  • Etc.

It is a very interesting formula to increase your wealth in the long term, and in fact it is the basis of my High Performance on the Stock Market (ARALP) course.

But even if your main goal is to achieve financial freedom, my advice is that at least part of your investments go to generate variable passive income.

The reason is that, in certain cases, it is possible to obtain a very high return from the revaluation of an asset.

➡️ # 3. Take advantage of the magic of compound interest

Once you start generating passive income, your first impulse will be to spend it right away.

But my advice, if you already have your monthly expenses covered (hence the importance of having a monthly budget), is that You reinvest those earnings to benefit from compound interest.

This is a fundamental concept that I have already told you about in a previous post, but I will briefly remind you of what it consists of.

Let’s say you invest € 10,000 for 10 years with an interest of 5% per year. Under these same conditions:

  • If you spend the benefits: the first year you will charge € 500 in interest, the second € 500, the third € 500 (simple interest)… Thus, at the end of the investment your capital will be € 15,000.
  • If you reinvest the profits: the first year you will get € 500, the second € 525, the third € 551.25… so until, after 10 years, you will have € 16,288.95.

And this difference increases the greater the investment horizon, the annual interest we receive and the capital invested.

✅ Put your money to work for you (and not the other way around)

The best thing about generating passive income is that its growth is exponential.

A small step now can end up yielding you very interesting profits in the future.

In fact, if you manage your investments wisely, it is perfectly possible to achieve financial freedom; I can attest to it myself.

In addition, in the short and medium term you will be able to depend less on salary, gain financial security and have more freedom of choice. Something that I consider essential in the times we live in.

If you want to know more about how to get started in the investment world, I encourage you to subscribe to the newsletter so as not to miss any of the articles that I publish on this blog (in addition, by doing so I will send you a guide with the 4 best ways to generate income Passives).

On the other hand, if you have any questions about the types of income that we have seen in this article, do not hesitate to leave it to me in the comments. I would be glad to help you.

Until the next article, I wish you happy investments.

See also  How Couples Can Achieve Financial Equity in Retirement Plans

Leave a Comment