Selling Your Time
This is the source of income that most people think about when it comes to making money. This is the money you receive for selling your time to your employer, often represented in the form of a salary or wages. You often hear well-meaning parents telling their children to find a “good job,” preferably one with benefits.
The rate of pay you receive depends on how rare and in-demand your skills are. For example, a talented neurosurgeon can earn millions of dollars a year because there simply aren’t that many people who can do the work.
A person pushing carts at a discount store earns less – not because they are less valuable as a person, but because many people have the ability to push carts, resulting in a large supply of potential workers and lower wages.
To earn more money, you need to invest in yourself to improve the rate of pay you can demand, work more hours, or do a combination of both. This type of income is the most active form of income, as you generate money only when you are actually working.
Earning Interest on Loaned Money
This type of income comes from money that borrowers pay you to “rent” your capital. The term “capital” refers to the money you set aside for investment purposes; you’ll hear this term quite often on Wall Street.
When you buy a Certificate of Deposit (CD) at a bank, for example, you are lending money to the bank in exchange for a specific interest rate. The bank takes the money that it has “rented” from you and lends it at a higher rate, keeping the difference.
Here’s an example of interest income: Michelle lends money to people wanting to buy a home but who have bad credit and cannot get a mortgage from traditional channels. They buy a property, and she lends them money to finance the purchase at an interest rate of 13%. For a loan of $150,000, Michelle would receive, at most, $19,500 annually, or $1,625 monthly, as interest income. In essence, her money works for her.
Profit Income from Owned Businesses
This represents your share of the profits of the company you have invested in. If you own 50% of a lemonade stand, and the business has sales of $1,000 with costs of $500 and a profit of $500, your share of those profits would be $250.
This money is paid to you as part of the company’s profits. A good investment is one that earns the company more money year after year, increasing the amount of cash that is sent to you regularly.
A person earning commissions on recurring orders without any work is essentially running a business. So is the person who patents a new invention and earns royalties on it, or the poet who makes money when a music star chooses their song for a new album.
Here’s an example of profit income: Tristan owns some rental properties. He buys real estate and then collects money from tenants to live in his homes. His rental business generates profits equal to the total rent he receives minus any costs, such as maintenance and upgrades on the properties. At the end of the year when he takes the money from the business, that profit represents profit income.
Capital Gains Income
This type of income is generated when you buy an investment or asset at one price and sell it at a higher price, resulting in a profit. For instance, if you bought a 50% share in a lemonade stand for $2,000 and sold it for $5,000, the difference of $3,000 would represent your capital gain.
It does not matter what we’re talking about – homes, rare paintings, diamonds, fountain pens, businesses, furniture, pure Canadian gold coins, stocks, bonds, mutual funds, or brand-new unopened Barbie dolls – if you buy it at one price and sell it at a higher price, the resulting profit is called “capital gain.” If you lost money on the deal, it is referred to as a “capital loss.”
Benefits
Using All Four Types of Income in Your Portfolio
As your portfolio grows, you may find yourself earning all four types of investment income.
The Berkshire Hathaway Model recommends using multiple income sources to build wealth: interest, dividends, and capital gains. Why focus on these three? First, money earned from selling your time – salaries and wages – is often taxed at much higher rates than other types of income. Second, there are only 24 hours in a day, so you can only work for a limited number of hours. At some point, it becomes physically impossible to sell more of your time.
If you reinvest your annual earnings, you may find yourself earning more than you can imagine after several decades.
Source: https://www.thebalancemoney.com/the-four-ways-to-make-money-357336
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