3 Types of Income Explained: Active, Portfolio and Passive Income

American billionaire Warren Buffet says, every person should have at least seven sources of income, if a person wants to have a secure financial future. Many people wonder, is it really possible for anyone to have seven sources of income at the same time?

Obviously, most people think about their jobs or businesses when they think about an income. This means, they limit their sources of income to only one. Unfortunately, most people live all life with a single income and sometimes, a small side income from simple jobs they could do in spare time.

But are you aware that you could actually have seven, or even more sources of incomes even while you’re working? That is by having different types of income like, active income, a passive income and something known as a portfolio income.

You may be hearing about passive income and portfolio income for the first time. Therefore, I will explain what they mean. This could encourage you to have all the different types of income and get a lot of financial security for family and self.

Actually, it’s very simple for every person in USA and anywhere in the world to have an active income, passive income and portfolio income. In simple words, it means having enough money from every possible way.

Let’s start by understanding what they mean.

What Are the Three Types of Income?

1. What is Active Income?

The money you get daily, weekly or monthly is your active income. It could come from a job or business. Active income basically means, you’re working actively to earn it. That could include freelancing and side-gigs as well.

In some countries, pension is also considered as an active income. That’s because it comes from your activities in the past, as worker or businessperson. Generally, most of us depend upon our active income to meet our daily needs and those for family.

An active income is the most important source of money for a person, though it might not be the biggest. This means, you might be making some money from a job or business or side gigs. However, this money might not be much when you compare against the passive income or portfolio income.

In some cases, the passive income and portfolio income could be larger. However, we keep the job or business or pension because it is stable.

The definition of an active income also means a stable and regular payment that you get in return for your skills and efforts.

2. What is Passive Income?

Passive income is perhaps the most confusing among all. A passive income is money that you earn even while you’re asleep. You’re not actually working for this money actively. You’ve done some work in the past and that’s fetching you some money daily or even every month.

A classic example of passive income would be a study course that you’re selling online. You’ve already made the course and have uploaded it for sale on websites such as Udemy or Coursera, among others. When someone buys your course, these websites send you the money.

There’re various ways to make a passive income. One of them is starting a blog and doing affiliate marketing. The other is opening an online store or selling something online through other websites such as Amazon or even Facebook Marketplace. You’ve uploaded the post just once and it continues to attract customers.

Royalties from the sale of books, photographs, art and other sources that accumulate in your bank account regularly are considered as a passive income. As a matter of fact, this is the best way to have an additional income from one or more source, with little or even no investment.

3. What is Portfolio Income?

A portfolio income is both, a form of active and passive income. On some occasions, you would have to work actively on the portfolio and on other days, you can simply let the money come in.

Actually, a portfolio income doesn’t pay you money regularly such as every day, week or month. Instead, it accumulates on your name.

The portfolio we’re talking about here is your investments. It can consist of annuities and retirement plans, savings plans, stocks, bonds, currencies and cryptocurrencies, Mutual Funds, Exchange Traded Funds and lots more.

These work on the simple principle of ‘fire and forget’. That means, once you put in your money, there’s no need to continually work on it.

In some countries, the house you own and gold jewelry you have as well as collectibles such as art, rare liquor and stamps, coins, currency notes and other stuff also count as portfolio income. Because, their value keeps rising, even if you’re not going to sell any of these now or later.

The income from a portfolio is available only when you liquidate or sell any of these assets that you hold. And as long as you hold them, their prices continue to rise. In the case of stocks, ETFs and Mutual Funds, you can also get some dividends for the assets and holding them.

However, if you’re actively trading on stocks, commodities, currencies and cryptocurrencies daily, it doesn’t remain a portfolio income. In such cases, it become an active income.

Seven Sources of Income

When Warren Buffet speaks about at least seven sources of income, the American billionaire actually refers to investing our money from active income. We could use our education, experience and skills to launch an online business or some venture that gets us money regularly, even if we don’t work for it daily or even occasionally.

For example, if you start an online store and at the same time, offer an online course, you have two sources of income more. That means, you would totally have three sources of income.

Now, when it comes to the portfolio income, you can add the other four, to make it a total of seven sources. You could invest on various things to create a portfolio. Generally, a good portfolio consists of bank savings plans, stocks, ETFs, currencies and cryptocurrencies and other assets. You can select any four ways to invest to achieve a total of seven sources of income.

Another source of income you could add, to have an extra active income would be freelancing. This means, other than your regular job, you could also freelance with your skills during spare hours and make some more money.

Having seven sources of income is always the best way to live. It becomes possible to have an active, passive and portfolio income when you use the money you make in a wise and careful manner.

Importance of Active, Passive and Portfolio Incomes

The Covid-19 pandemic actually proved to people around the world that only one source of income from a job isn’t really enough. People that lost jobs would have found it hard to meet their basic needs if they had no savings. This means, they lost their active income.

However, at the same time, people with passive and portfolio incomes need not worry much because they still have money that’s working for them. Though the demand for a course or product could be lower during such pandemics, it doesn’t mean that a business is dead already.

Similarly, a portfolio of stocks and other assets can drop over a short time span but that would rise again, when the economy recovers. Having all the three types of income can make you financially stable.

Conclusion

Now that you’re aware of the three types of income- active, passive and portfolio, I would encourage you to strengthen them. Start by investing little amount of money in your portfolio and make something that people will require, for a passive income.

The best way to get a passive and portfolio income is by investing from your active income actively. Its not at all difficult to have an active, passive and portfolio income, if you exert extra efforts. Or you could take guidance from a good financial advisor.