Income streams explained and simplified

ByWealth Diagram

Explanation of how income streams work. We are going to go over earned income, passive income, portfolio income, also their subcategory known as dividend income, capital gain income, rental income, profit income, interest income, and royalty income.

This is my opinion base on my knowledge and understanding. I’ll try to explain and simplify these income streams. Like always, Do your own research.

An income stream is a way of generating regular income, usually on a consistent basic. Here are some income streams that can be use to make you wealthy.

First, One thing to keep in mind is that the government can only tax earn income, passive income or portfolio income.

  • Earned income
  • passive income
  • portfolio income

There are other names of income streams bellow. But the bellow following names are a subcategory of three above.

  • Dividend income
  • Capital gain income
  • Rental income
  • Profit income
  • Interest income
  • Royalty income

Earned income

Earned income is simply any income that a person can received from a job or from self-employment. earned income can include any wages, any salary, any commissions, any bonuses and any tips.

A job is when you get paid for working for someone else.

Example:

If you work at a fast food restaurant in customer service, then you have a job. An Employer pays you the employee to do a job.

The government tax the employer and tax you.

Self-employment is when you get paid for working for yourself.

Example:

If you work as a handyperson, someone that fixes things. A person that has skills in a wide range of repairs, usually around the house. Then you are self-employed. Customers pay you to fix their things.

The government tax you twice. They tax you twice because you are both, the employer and the employee at the same time.

Passive income

Passive income is when you earned income without you being involve or with little effort or with no effort. Such as Rental income and royalty income.

Rental income is consider passive income

Rental income is income from renting a house, or apartment to tenants.

Royalty income is consider passive income

Royalty income is income from other using your ideas.

Example:

Book royalty, if you write a book. Someone else manage and sell that book. You just receive a portion of the money that the book generate as royalty.

Portfolio income

Portfolio income is income received from investments such as dividends, capital gains, and interests. Is important to understand that portfolio income is neither passive income nor earn income. Why? because of tax purposes.

Dividend income is consider portfolio income.

Dividend income is income from owning stocks.

Example:

If you were to buy a share of EXXON Mobil Corp (XOM). This is an American company, a multinational gas and oil corporation. Then you will get pay dividend income 4 times per year ( not including specials).

Capital gain is consider portfolio income.

Capital gains is when you buy a stock at a certain price then that stock goes up in price value. Capital gain is consider realized when you sold the asset(aka profit).

Profit income is consider portfolio income.

Profit income is income from buying and selling.

Example:

If you where to buy a share of stock at $100 and one month from now it goes up in price to $120 then asset is consider a capital gain of $20.

Now if you were to sell the stock at $120, it means that you made a profit of $20. Of course minus any fees or taxes.

Interest income is consider portfolio income.

Interest income is income from lending money to others.

Examples

Savings account. By putting money into a savings account, you are lending money to the bank. The bank use that money to invest and earn interest for lending the money to others. Then the bank pays you an small amount of money in interest to you.

That’s it.

Now, start and adjust as you go.

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