3 Types of Income

In general there are 3 types of income:

• Earned income
• Portfolio income
• Passive income

Employees and self-employed work for earned income, which is the highest taxed income. Employees already have their taxes taken out before even receiving their paycheck.

I remember when I was younger and working my first (and second to last) serious job, as a Web designer. I earned $32,000 per year. This was at the height of the dot com boom. I just considered tax less money I earned. I thought, “¿Why do people complain about tax? To know how much you make just count what you actually get paid after taxes.” I had no idea that not everyone pays the same in tax and that if you owned a business or real estate there were great tax advantages.

Portfolio income comes when you invest for capital gains like buying a stock and selling it higher than you bought it for. This tax is generally lower than earned income tax. (28% in the US)

Passive income is income you no longer work directly for like receiving real estate rental income or owning businesses you no longer manage that generate profits. The taxes you pay with this type of income can be virtually nothing depending on what you do with the income.

In the end, taxes are our #1 expense.

That’s the importance of financial education. Back when I was 21 I knew nothing about any of this and was happy to collect my paycheck. Ignorance is great for the government but bad for the financially ignorant, at least if they want to become wealthy someday.