Types of Income Explained
You need to understand the types of income there are.
Choose the wrong type of income and you risk a life of misery and regret, working a job you hate with no financial rewards. And zero free time.
You don't want that.
But when you learn the type of income that builds massive wealth with abundant free time, the world changes.
I have a dream.
The dream is to make a lot of money, spend only a few hours a week working, and enjoy loads of free time with friends and family.
Like spending two months living abroad in Europe. Or taking the family to the Maldives for 3 weeks.
A good, consistent income with a limited work schedule that I control. As James Schramko would say, “Work Less, Make More”.
I hope you have the same dream.
The 3 Types of Income
The 3 types of income are:
- Hourly / time-bound
- Leveraged / semi-passive
- Passive (but is it?)
You may think you know what these are. Let's review them anyway to make sure you understand the details.
Because only one type of income will lead you to massive income, wealth and control of your time.
Let's dig in.
1) Hourly / Time-bound Income
The income type you know the best is hourly income.
Sadly, this is the most common type of income. I say sadly because hourly income means you give up your most precious resource: time.
Over 58% of U.S. workers are paid by hourly wages. (source)
Hourly income is just that: you get paid a certain rate per hour worked.
The first example that comes to mind is minimum wage. That's the lowest hourly amount you can legally get paid.
The current minimum hourly wage in the U.S. is $7.25. It may be higher depending on which state you work in. For example, Washington State has a minimum wage of $11.50 per hour.
Hourly income is the worst way to build wealth. Because to earn more you have to work more. There is a direct correlation of time spent to money earned.
Hourly income means you give up your most precious resource: Time
That can be okay if you’re unemployed and get an hourly job. Or going from 20 hours (part-time work) to 40 hours a week. You still have your nights and weekend available to live. A little.
But if you’re already working 40 or 50 hours a week, it starts to get painful. To make more money you start eating into your free time. This can lead to burnout, stress, depression and bad health.
No matter how much you're making, having a miserable life is not the kind of wealth we're after.
Say you work an 8-5pm hourly job, but want to earn more driving for Lyft. You have to trade your free time for money. The more money you need, the less free time you have.
What is 'time-bound' income?
I differentiate time-bound income from hourly in two ways:
- Salary employment - While not technically hourly work, there is an assumed hourly rate based on expected work hours. And you may not get overtime pay. Working longer makes your hourly wage drop. Yikes!
- Professional fees - Lawyers and consultants may charge a high hourly rate ($200-1,000 per hour or more) but it’s still a time-for-money transaction. There is other work to be done outside of the actual hours billed. If you use the term "billable hours" you're in a time-bound job.
Either way, your income is limited by time.
You can do better.
23) Leveraged Income
Everyone wants to talk about passive income.
Look at how many results there are in Google:
Some people think there are ways to get paid money for doing literally nothing.
There are three income sources that are sorta passive. But not really. We discuss them below.
There is no such thing as 100% passive income. Stop trying to find it.
This obsession with “passive income” distracts people from the source of most wealth:
→ Leveraged income
Leveraged income (also called semi-passive) is where you get paid multiple times for the same hours worked.
Or you front load the work and then get paid a large (and recurring) income later. Often only spending a few hours a week to maintain it.
That's a beautiful thing.
- Group events - You spend three hours teaching and charge each student/participant $500. With 20 students you earn $10,000, or $3,333 per hour. To increase your income you increase the number of students. Not by working more hours. At 50 students, your income goes to $8,333 per hour. For doing the same work.
- Online courses - You research, develop, and build an automated online course to help someone solve a specific problem. You spend 60 hours in development. The price of the course is $200. You have 1,000 people go through the course over two years. That’s $100,000 per year in income, or $8,333 per month. You spend 10 hours a month in support and answering questions in the course. That is an hourly rate of $833.
- Audio / visual / written media - Just think about book authors, movie stars, and pop singers. They create media (a song, movie or book) one time and leverage their income through mass distribution. This can work for blogging too. If you write a great blog post that readers love and share, you can leverage your income. Through advertising or up-sells to other income sources (like online courses), you can earn a lot of money for little extra work.
There are a ton of other examples. Software, revenue share deals, podcast sponsorships, affiliate marketing. You get the point.
Leveraged income is where you get paid multiple times for the same hours worked. Or front load the work and get paid a large (and recurring) income later.
This is where the opportunity (and massive wealth) lies.
You can call it business ownership, self-employment or working for yourself.
The key is to build or create products, services , or other assets you control. Income where you are NOT paid only for your time.
The internet and automation plays a huge role in building a leveraged income.
With leveraged income, once you put in the work and get traction, the financial rewards can go on for years. You really can work less and make more.
3) Passive(ish) Income
To be clear, there is no such thing as 100% passive income. No, don't argue with me.
The closest you can get to truly passive income is:
- Investment income (dividends and interest)
- Social Security payments, and
Here's why these are not really passive income sources. Certainly not 100% passive as some would have you believe.
Let's debunk this myth.
With investment (portfolio) income, like dividends and interest, you don’t have to work. You just sit back and get paid, right? Isn’t that 100% passive income?
Sure, it’s passive NOW.
But you had to work and save for years if not decades to build up that portfolio. Maybe in a soul-crushing hourly job that you hated. With no control over your schedule. And little free time to spend with your family.
That's not passive. You can't snap your fingers one day and have a $1,000,000 investment portfolio. Besides, $1,000,000 may not be enough anyway.
Social Security is the same as investment income. You have to work for years and years paying FICA taxes to qualify.
Specifically, the Social Security Administration takes your 35 highest income years to calculate your monthly benefit. To get the max benefit you have to work for at least 35 years.
That's a long time.
I guess if your spouse is the fully insured Social Security recipient and you take the spousal income, that’s pretty passive. But SOMEONE had to put in a lot of work.
That is anything but passive.
Okay, inheritance may be the closest to a true passive income.
But there are still things you have to do:
- Probate the estate (can take years)
- Re-title inherited assets
- Sell assets to reinvest
- Open Decedent IRAs and other accounts
- Choose a new portfolio of stocks and bonds
- Set up the monthly transfer of income
Still not 100% passive, obviously. And we didn't mention that someone dies.
What You're Really Giving Up for So-Called "Passive Income"
Working 40 years in a miserable job to build an investment portfolio is not the way to wealth. And certainly not time freedom.
People give up huge portions of their prime living years sitting in traffic, working jobs they don't enjoy, waiting for the one or two weeks of vacation where they can feel in control.
Your 30s, 40s, and 50s are when you're healthy and your kids are still at home. There is a limited window to experience the world together.
That's the time when you should be making memories, traveling to exotic places and creating those stories you tell when you're older.
Too many of us are missing out. Scraping by to pay the mortgage, student loans and credit card bill. Trying to save 10%. Okay less than 10%.
For what? So you can have a mediocre retirement at 65?
I don't think you're going to climb mountains, bike around Europe or start that new business in your 70s and 80s.
You could be lucky. Maybe you'll be in decent health and be able to travel. Maybe not.
Too many of us are missing out. Scraping by to pay the mortgage, student loans and credit card bill. That sucks.
My dad passed when he was 70. Luckily he was a business owner in a high-paying field. He had a leveraged income for sure. And he used it.
He traveled the world while he was healthy. That should be your goal.
I'm not trying to be a downer about building passive income. Truly I'm not.
I just see too many people searching for the Holy Grail of "passive income". Where you push a button and money rains down from the sky.
It doesn't exist. And searching for it makes you susceptible to scam artists and spammy network marketing "opportunities".
The Way to Wealth: Build a Leveraged Income You Own
You don't want to work an hourly wage. At least not forever.
And "passive income" sources like an investment portfolio, Social Security, or inheritance have their drawbacks. Like taking decades before producing enough income.
There is a clear path to wealth and freedom: A leveraged income that you own.
Are you up for building yours?
Sure, it can take time too. But in 3-5 years you can have a significant income that makes a difference. That's a lot better than waiting 40 years.
You can create a $10,000 per month income. It is possible. I promise.
You just have to decide that a leveraged income is what you want. And then get started.
It won't be easy. But it will be worth it.
I'm here to help, if I can.
What questions do you have? Does this sound crazy? Did I expand your thinking?
Leave your comments or questions below.