A Basic Breakdown of the Income Spectrum
A big part of designing your life is understanding the different types of income and deciding which is right for the lifestyle you want. I find it’s best to work backwards. Start with what your ideal lifestyle looks like. Next, determine what financial situation you need to live that type of life. Finally, decide what type of income you’ll need to make that happen.
If you’re at a loss with what type of lifestyle you want, check out my post on how to figure out what to do with your life.
There’s a spectrum when it comes to income types. In this post, I’ll be discussing the three main points on that spectrum.
On one side of the spectrum we have active or earned income, which is exchanging time for money. You make earned income by actively working a 9-5 or any type of hourly job. You put in a set number of hours, typically 40 per week, and get paid a set amount for your time. Active income gives you very little control over how much you make and how much free time you have. While you can definitely work hard for a raise, it’s not 100% dependent on you. The company you work for simply might not have the budget to give you a raise. While earned income is the most main stream type of income, it’s not the most efficient and won’t give you the most flexibility in life.
On the opposite side of the spectrum we have passive income, which is income you generate by doing something one time that will make money over and over again. For example, if you put 1.5 million dollars into the S&P and average an 8% return per year, your return is passive income. You did something once (researched the stock you wanted and made a deposit) and it makes you money over time without you having to do anything at all. Passive income typically requires the most capital and is the hardest to achieve. But, once you do achieve passive income, you have the most freedom.
Semi-passive income is in between earned and passive income. While it does require time spent, it’s not a whole lot of time. In addition, the time you spend working is not directly correlated to the amount of money you make. For example, if you’re a day trader in the stock or foreign exchange market, you might spend 4-5 hours a day trading. You therefore have more freedom than most and more control over how much money you make.
Of all the types of income, semi-passive probably has the widest range. For example, a type of semi-passive income that’s closer to passive income on the spectrum is real estate. You spend a fair amount of time looking for the right property and filling it with tenants but once everything is up and running, you don’t have to put too much time in. Semi-passive income is kind of the sweet spot on the scale. It’s much easier to attain than passive income and it’s more effective and flexible than active income.
The bottom line…
The most important thing in deciding what type of income will fulfil your dream life is this: whatever you do to make money should be something you love and feel inspired to do every single day. If it’s not, you’ll find it’s extremely hard to stick with it and you won’t easily find success. Also keep in mind that it is possible, and probably most beneficial to have multiple types of income at once.
Comment below and let me know what type of income you’re after!