How many types of income streams of income do you have?
If you’re like most people, probably only one. Maybe two. But if you want financial security – not to mention stop working at some point in your life – then it’s a good idea to diversify your income streams.
Today, I’m going to give an overview of all the different types of income streams and then focus on some practical ways to add more streams of income into your bank account.
There are two big categories of income streams: active and passive.
Active vs. Passive Income
All income streams fall into two broad categories: active and passive income.
What is active income?
Active income is money that you need to actively work for. For example, your job. If you stopped showing up at work, you wouldn’t get paid.
What is passive income?
On the other hand, passive income is income that is decoupled from your time. It’s usually money that you make from an initial investment of either time or money that continues to earn income without your direct activity.
For example, starting and monetizing a YouTube channel is an example of investing your time upfront for passive income (i.e., ad revenue) down the road and investing in an apartment syndication, is an example of investing your money upfront while producing cashflow passively over time.
Now, let’s talk about more specific types of income streams.
7 Types of Income Streams
Here are seven different types of income streams that fall within those two categories. I’m going to list them from least passive to most passive:
1) Earned income: money that you earn through your job
A paycheck is your active income. This can be a full-time job, part-time job, working as a freelancer, or driving for Uber Eats as an independent contractor. When you work, you earn.
You can have multiple types of earned income. For example, it’s growing more and more common to hold both a “9 to 5” job and a side hustle.
2) Profit or business income: money you make for selling a product or service
When you start a business that is selling either products or services, you move beyond just trading your time for money and start to build leverage through selling a product or selling services that other people fulfill.
For example, a graphic designer makes earned income by working with clients. But if a designer sells templates or digital downloads, they’re now earning leveraged business income from a product they made once but get to keep on selling repeatedly.
Or if that graphic designer starts an agency and employs other designers to fulfill the services, they’re earning leveraged income through their business.
To run a successful business, you should expect to be active in the business at least at first, but eventually it could become passive income if you build a team to run it for you.
3) Royalty income: money you make from making, designing, or owning something unique, then charging people and businesses for using it
For example, if a movie wants to use a Taylor Swift song in the background of a scene, it pays her a royalty fee to be able to use it.
This is a form of passive income; once you’ve made it, you can start charging people and businesses for using it. It takes work upfront to create the assets, but then you’re able to earn from it on a consistent basis.
If you have any sort of artistic ability – like music, graphic design, or photography – then this could be a profitable source of income for you.
4) Rental income: money you make from owning property and charging people to use it
This is another form of income you’re probably already familiar with. If you’ve ever rented an apartment, then you’ve been a part of this equation as a tenant. To be the one earning the rental income, you’d purchase a piece of real estate and you let someone else live there in exchange for payment.
This is a form of passive income, but it takes both a financial investment upfront and some of your ongoing time to manage it depending on how you do it.
Being a property owner can be a very hands-on experience. If the fridge or AC breaks down, then you’re responsible for getting it fixed - unless you hire a property management company to run it (which eats into your returns).
Want to learn more about the surprises of being a landlady? This is everything I wish someone had told me before I bought an investment property.
There are also more hands-off ways to invest in real estate. For example, you can invest in multifamily homes through apartment syndication or with investment platforms like RealtyMogul or Fundrise.
But while rental properties are the most common avenue of rental income, you can rent out other things. For example, Getaround is a car sharing app that allows you to rent out your car and more businesses like this are popping up all the time!
5) Interest income: money you make from lending your money out
There are multiple ways to do this, but a simple example is government bonds. When you buy a government bond, you’re essentially lending your money to the government, and in return, they pay you your money plus extra in exchange.
You can make interest on bonds and it is a form of completely passive income.
Learn all how to make interest income in I-bonds!
6) Capital gains income: money you make from buying and selling an asset
“Capital gain” refers to an increase in the value of an asset when you sell it. So, if you buy a dress for $4 at Salvation Army then sell it for $20 on Poshmark, your capital gain is $16.
You can make capital gain income on anything you buy and sell for a profit – stocks, a house, furniture, and much more.
Capital gains can be a good source of income…but in order to actually collect the money, you need to sell the asset. This is different from something like rental income where you are able to generate cashflow income while still owning the asset.
Our next stream of income is a way that you can generate cashflow from an asset like stocks while they continue to appreciate so you can one day sell the asset for a capital gain as well.
7) Dividend income: money you make from dividend payouts
Interest and dividend income are often lumped together, but they are different, so stick with me.
If you buy a corporate bond, you’re lending money to that company. But if you buy a stock, you’re buying a percentage of ownership in that company.
So, when a company makes money, they can either reinvest in the company or they can offer dividend payouts to their investors.
If you’re invested in a company that pays dividends, then you’ll receive a portion of dividends depending on what percentage of the company you own.
This is a form of passive income and you can make dividend income by buying stocks or investing in private companies.
The key difference between interest income and dividend income is that interest income is more reliable but typically less profitable. Dividend income is riskier as it is not guaranteed, but often more profitable.
How many types of income streams should you have?
Like I mentioned earlier, earned income is money you earn through your job (i.e., your paycheck), and unfortunately, that’s where a lot of people stop.
If you want to get ahead financially – not to mention stop working at some point in your life – you need more streams in your life.
There’s no one-size-fits-all answer to how many streams of income you should have. It depends on the lifestyle you want and the skills you have. But 65% of millionaires have at least three streams of income, and that’s an achievable number for most people.
Of course, the easiest and most reliable way for you to add more income is by investing. If you want to learn the principles of successful investors, check out our free masterclass, Master Your Money, where we explain our tried-and-true system for building wealth.
A Weekly Sip of Our Best Advice
Join 500k+ women getting practical financial tips and empowering strategies with the Dow Janes newsletter.
We respect your privacy. We'll use your info to send only what matters to you — content, products, opportunities. Unsubscribe anytime. See our Privacy Policy for details.
