Earned, Passive and Portfolio Income

There are 3 types of income generally; earned income, passive income and portfolio income. Earned income comes from being an employee or working for someone else. You get paid for the hour you spent doing a particular task you are engaged to do. Most people will say that workers work just hard enough not to get fired and employers pay just enough for workers not to quit.

The income an employee can generate from working for an employer is limited due to the fixed rate he or she is paid. The only way an employee can earn more is to do overtime or to get a pay raise from the employer. There is a limit in which an employee can do overtime due to the number of hours available each day and the work that maybe available for them to do so. Although he may get a second job but this is restricted by the time and energy available to him. A pay raise may only happen once a year and the percentage of increment maybe limited. The extra effort put in by the employee is only making someone else richer which is the employer!

If you are an employee, you will only get your money after deducting all the taxes, expenses and your bills. Generally this amount is not enough and you are bound to use credit facilities like hire purchase, loan and mortgage to live the lifestyle you like. Now, this is one big mistake. Do not ever get debt-ridden. It is the quicksand to poverty.

Earned Income is a steady way to generate an income. There is not much thinking or worrying to do as profit or loss in the company has nothing to do with you directly and as long as the boss pays you on time you will be happy. Of course there are a few exceptions if you work in a high and important position in a company where your thinking and decisions are crucial to a company. All in all, most paid jobs are repetitive and mundane. Most people are very tired of getting to their 9-5 rat race job and usually stay there out of job security and will most probably be waiting for the next holiday to come or to quit their job if opportunity permits. The earlier it is to get out of the trap, the better your chances are to attain financial freedom.

Passive Income is generated by doing businesses. Here you are the employer. You hire people to work for you. Your business can be selling products or offer services, or a combination. Examples are trading merchandise as in wholesaling and retailing, buying/selling real estate, operate a franchise like Starbucks of McDonald or even a small vending machine business which does not require any employee and etc. In most cases, you need not be physically present for the business to operate.

The beauty of doing your own business is that you work for yourself and your time is more flexible as you can make your own schedule. Another advantage is that you earn and spend before tax, unlike being an employee where you need to pay the tax before you can spend your income.

Portfolio Income is just like passive income, you make the money work for you. Portfolio Income is generated from paper assets such as like fixed deposits, mutual funds, bonds and stock market. They are known as paper assets due to the fact that they revolve on papers to generate the income for you. In portfolio income, financial knowledge is of vital importance. It can make you rich depending on the skills and knowledge you have on the financial market.