Personal Finance 101: Exploring Different Types Of Income

This article was originally published on ValueWalk

Different Types Of Income

Entering the world of personal finance can be genuinely overwhelming. Unfortunately, it doesn’t come with instructions, confusing you about how to earn and manage money.

Thanks to this guide, you’ll become a pro at different types of income. In addition, you’ll learn how to budget, save and set financial goals.

Earning

Most newbies in personal finance focus on just one earning stream: a full-time job. Yet, there are two more ways you can earn your money: side hustles and passive income streams. Depending on your interests and possibilities, you can occupy yourself with just one or take up all three.

Full-Time Job

A full-time job can also be called “earned income.” Since you’re investing your time, energy, or even materials into the full-time job, it’s also considered active income. For example, if you work as a customer support employee in an office, you invest time and interact with customers every workday. It’s an active income since you’re actively participating in the exchange.

In exchange, you receive money in the form of a salary or hourly wage. Some jobs also pay tips and bonuses. Depending on your workplace, you can also take up additional working hours. Yet, most jobs follow a 9 to 5 approach.

Side Hustles

In addition to full-time jobs, active income includes any side hustles. You still invest your time and energy into freelancing and completing micro jobs, even outside your typical working hours. Side hustles you can do include:

  • copywriting;
  • dog walking;
  • babysitting;
  • social media management;
  • handy work;
  • food delivery;
  • writing paid reviews;
  • selling handmade products;
  • car washing, and more.

Passive Income

Passive income, however, comes from ventures without your active involvement. People who invest in dividends, interest, royalties, and capital gains receive portfolio income. Additionally, residual income, another form of passive income, is earned through investments or activities that continue to generate money on an ongoing basis after the initial effort. You can make this type of income by investing in the following:

  • Opening a crypto account or wallet and investing in popular cryptocurrency can generate a great passive income stream. You can earn interest on your crypto, mine the currency, lend it for fees, and so on.
  • Investing in stocks is similar to cryptocurrency but considered a lot safer. Open a brokerage account and choose a few stocks for a well-balanced portfolio.
  • Real estate. Buying real estate to rent it out and generate passive income is a well-known strategy. Even if you don’t have money to buy an entire apartment for renters, you could occupy it and rent out a spare room instead.

Of course, you don’t have to invest money to start generating passive, residual income. There are other ways to do so, including sharing your excess internet bandwidth and dropshipping.

Managing

Personal finance doesn’t end on earning money, though. After you get some cash, you must learn how to manage it. So, setting personal financial goals, budgeting, and saving money is essential for a responsible and successful individual.

Set Goals

Setting goals is motivational and helps you understand why you’d want to work and earn money in general. Goals will help you develop your priorities straight. Of course, financial goals will be drastically different and unique to every individual. Think about what you’d want your life to be like in five years. Be realistic. Then, set a few goals depending on the picture.

All of your goals can be prioritized in terms of needs and wants. For example, building an emergency fund or paying off debt is necessary. Upgrading your car (given it works well) or going on a lavish vacation is a want. Set general deadlines for each goal, and you’re done.

Learn How To Budget

Once you know your primary goals, it’s time to set a suitable budget. A financial budget is helpful in many ways. It keeps your spending habits in check and helps you track your earnings and savings. Like goals, your budget will change and adapt to your new needs and wants.

The first step to creating a budget is calculating how much your make a month minus taxes. That includes all your income streams, like a full-time job, side hustles, and investments. Note down that amount. Now, look at your monthly expenses like rent, transportation, groceries, etc. At last, you have all the information needed to set a budget. There are a few budgeting methods you can try:

  • the 50/30/20;
  • activity-based;
  • incremental;
  • zero-based;
  • flexible;
  • envelope, and more.

Come Up With A Savings Plan

A savings plan will be based on your budget and help you achieve your financial goals. After creating a budget, you already know how much you’ll be able to save every month. So, look at your goals and priorities, then plan how much you’ll put toward every goal.

You’ll also have to decide how to store your savings. In 2023, you can open online savings accounts. If you’re saving for an emergency fund, ensure the money is accessible. Otherwise, use high-yield savings accounts to earn some interest along the way.

Conclusion

Earning and managing money is challenging for a beginner. You need to differentiate between different types of income and pick an efficient budgeting method. Later on, your budget will also shift according to your goals and preferences. However, this tense and mind-blowing process will benefit you in the long run. Now, you’re ready to take up a new financial challenge!