I’ve written about this concept before, and I think it’s common sense that sometimes gets lost in the obsession many of us have to save money. Yes, I’m one of those people that likes to save money, but I’ve also grown more and more cognizant of the reality that cash flow truly is king. It’s important to get it, keep it, and secure it. Easier said than done, I know, but it’s important!
So if income is the first step to financial success, it’s probably worth stepping back for a minute and thinking about the types of income that we can potentially earn. Here are 4 that I came up with:
What I more specifically mean by this is income from your job or business. There might be a more “technical” definition of earned income from a tax and/or accounting perspective, but for purposes of this post I’ll describe it as career/business-related incoming cash flow.
This, for many of us, is the lifeblood of our finances. Without work, we don’t have money. At least when we’re younger, anyway. And actually for most people until later in life, that’s probably the case for better or worse.
Speaking of later in life, that’s when it gets tougher to make money in this way. Health issues can pop up, and in that sense we simply have to expect the unexpected. We can put the odds in our favor by making smart choices, but you never know what can happen, right? So work when you can, and save as much money as you can when younger.
If you made money from your work, as described above, those savings can be put to work! If you let money work for you, it has to be easier than working yourself to the bone, right?
This can come from stocks, mutual funds, and other sources. By earning the money first, we can then add an employee (our money) to keep making more for us. The thing about investing is that we want to beat the rate of inflation and then some, as every percentage point counts with rate of return!
Okay, this doesn’t apply to me. And this is a category that I’m not sure too many others think a lot about. But the reality is that there are people out there that get money from their family in one way or another. Be it via an actual inherited lump sum, a trust, or simply money from wealthy parents, there are people that fall into this “inherited income” category.
This seems to me to be a matter of chance for most people. But for those who benefit from this, there might be less incentive to deal with earned income.
This is an area that I think has a lot of shades of gray. No, I don’t mean the book either 🙂 Rather, there can be some income that is low effort but not necessarily passive. For example, some people consider blogging to be passive income. I sure don’t! There is a small percentage of people that do quite well, but for most bloggers the effective hourly rate makes it something that is more of a side venture as opposed to a full-time deal.
Truly passive income would involve very little work. Maybe royalties? Continuing the blogging theme, perhaps you could create an online course in your area of expertise? If there is demand, each sale afterward could be passive income. You already put in the work up front, and then you can get the income later.
Bottom Line: When I look at all these types of income, what resonates with me is that unless someone is from a wealthy family, there will be hard work involved in making money. But the best thing to do is work as hard as you can when younger, and do so in a deliberate way so that your money and accomplishments can then work for you later. This means earn income, make sure you save it and invest it, and create income streams that can pay you later after the work has been done. Personally, I’m still in the stage where earned income is going to be required for quite a while.
My Questions for You
How much thought do you give to types of income, and different ways to generate cash flow?
What stage are you in right now? The earning income stage (like me), or are you fortunate enough to be living off investment or passive income at this point?