Basics of Investment - Income

While doing Investment, the first question we get – from where the money will come for investment? The answer is from our Income. In simple terms, income is anything, which increases your net worth. This can be in terms of money or in terms of gift / asset, which can be sold to get the money.

In broader way, Income can be of three types based on its source – Active, Passive and Portfolio Income. 

Active Income is the income for which we perform some kind of activities. In return, of that we get money. The simplest example of this is Salary. Every month we need to perform in our respective jobs and in turns of that, we get salary. Apart from that, Commission, Tips, Income from Business are also considered as Active Income.

Passive Income is the income from some source where we are not actively involved. We may need to invest some money initially or may need to do actively do some work initially, but onward, it will generate income without any activities. One example for this is YouTube videos. If you post a video in YouTube, you are actively creating that for the first time. After that, whenever someone will view that you will have some income (based on YouTube policy). The same kind can be Blogging, Publishing Books etc. Rental Income also comes under this category. If you invest some money one time, purchase one house, and give it for rent, it will generate income without any further activities (considering you will be getting rent more than the maintenance cost).

Portfolio Income is the income, which you earn from your existing investment (which we will be discussing later). For example -  interest, dividends income etc. This income can be further invested for more return. We can also say, Portfolio Income is a subset of Passive Income. You may think, you have a job and you are getting good salaries from that. Then why there is a need of other passive income? Legendary investor Warren Buffet says - “Never depend on a single income; make an investment to create a second source”.

Your first goal before doing any investment should be to generate sufficient passive income, which you will invest to get a portfolio income equivalent to your active income and that will be called Financial Freedom! 

Income can also be classified in two categories based on its type – One Time income and Recurring income. 

As we can understand from its name – One Time Income is the income, which you get one time. Example of this type of income can be Incentives, Tips, income for selling any product etc. 

Recurring Income is the income, which you get in a fixed frequency. Like monthly Salary, monthly Rent, Annual Interest, Quarterly Interest etc.

It is highly recommended to track your income on monthly basis to take better decision on your Investment.

Parent Topic: Basics of Investment

Related Topic: Expenses, Savings