7 TYPES OF INCOME YOU SHOULD HAVE

  • Post category:Personal Finance
  • Reading time:11 mins read

There are 7 types of income people should have. To be financially stable, endeavor to have as many of them if not all. The more sources of income you have, the more covered you are against financial uncertainties.

For example, the current global pandemic has hit businesses hard. People are at home and businesses are not running. About a third of the world is in total lockdown.

People who only depended on their physical stores for survival will face tough times.

I am not saying that we should be afraid of putting our eggs in one basket but I mean that we should at least have several sources of income just in case one is hit by systematic factors that are beyond our control.

Here are 7 types of incomes that everyone should have.

Salary

This is the most common among the 7 types of income. This is what we get after working for a period as employees.

As we have seen, we should try and remove our reliance on this source of income as soon as possible. Wealthy people do not focus on it. Many highly successful people do not even have salaries.

For example, Donald Trump, the President of the United States only takes home 1 dollar as a salary. He is not interested in having a salary. He is good to go.

Even if the majority cannot avoid having a salary, they should not rely on it. This is prudence in financial management.

Profits

This is what you get after engaging in business activities. When you purchase or manufacture a product at x cost and then sell it at a premium, say y, your profit is y-x. It is REVENUE minus COST. This is the best form of income.

Though very unpredictable, it gives you control over your financial future. You do not have to depend on other people to survive. It is a good strategy and tool for your financial freedom journey.

The highly successful people in the world are wealthy because of profits, not salaries. The wealthiest people on earth are BUSINESS PEOPLE. They founded businesses that went ahead to give them insane profits.

This means that if you are not in business, forget about being wealthy. Even the richest politicians are business people. No amount of salary can make you wealthy. Just focus on profits.

Increasing profits

When it comes to increasing profits, you have several options. One, you can increase the price of your product. This will increase your revenue and consequently make you more profits.

However, this is not the best approach unless you are selling what consumers perceive as a SUPERIOR product.

People are only willing to pay more for a product they think is of greater value. In business, this is called the DIFFERENTIATION strategy. For example, a Ferrari is far more expensive than a Toyota.

Why is this so? Because Ferraris have a differentiation strategy. They make products that are of higher quality and sell them at a higher price. It all depends on your target market.

Two, you can increase your profit by reducing your cost. This is called COST MANAGEMENT. If you can produce something at a cheaper cost, you can make more profit even without increasing the price. This is a good strategy for most businesses.

For example, big automobile companies like Toyota, Nissan, and BMW have automated their production to be able to manufacture more cars at a lesser cost and time. They take advantage of mass production to reduce costs. This is called ECONOMIES OF SCALE.

Three, you can also find a way of selling to more people. This is the strategy I use in business. Instead of making your products expensive and sell it to a few individuals, just set a standard price and increase the number of buyers.

This takes time. You have to invest heavily in marketing. You also have to invest heavily in getting the right distribution channel that is convenient for the masses.

For example, I have a digital bookshop for my books on Giimark.com. This enables me to sell to people across borders. It is a strategy to sell to more people. Of you visit the site, you realize that the books are very affordable.

It is half of the retail price. It is about getting a small profit from more people instead of getting more profit from a few people. These helps not only you but also the consumer because the products are not overpriced.

Profit growth

Profits grow exponentially. Although it is normal to make losses immediately you open a business, profits will grow fast when they finally come. They come slowly but when they do, they are safe and very rewarding.

This is a type of income that all people should have. It will help employ more people and help grow the economy. It serves the interest of everyone.

The greatest advantage of profits is that it is taxed after incurring all the expenses. In a job, the government deducts personal income tax even before you pay your bills.

In business, it is different, you first pay your bills, and then the government taxes what is left. This allows businesses to determine how much tax they pay to a large extent.

If you want to pay less in taxes, you can incur as much in expenses as possible to reduce the reported profits. This is a legal tax loophole. I am not talking about forging figures, I am talking about legal expenditures.

For example, you can fuel your car from the business revenues rather than your salary and report that in your books as an expense. You have just reduced the tax due.

Therefore, profits are very flexible and they give one control over how much the government takes away.

Capital gains

This is what you get from selling a product at a premium. If I buy a piece of land at 1 million and sell it after 6 months at 2 million, the difference is the capital gain.

In this case, it is 1 million. Similarly, if I buy shares of a certain company and they appreciate, I make capital gains.

Capital gains are somehow RISKY and they need a lot of research and learning. Before you invest in a particular company, make sure you can foresee their growth. You have to forecast that the price is going to increase rather than decrease.

If the price reduces, you make capital losses. This is mostly done by sophisticated experts. Things like forex trading require experts to trade. Do not invest in what you do not understand.

When you conspire with insiders to foresee gains as a trader, this is called INSIDER TRADING and it is illegal. All traders in stocks are supposed to have a level playing ground to protect the interest of everyone.

Therefore, you need to understand such dynamics of the law and markets before you start investing so as not to find yourself on the wrong side of the law.

The secret here is to buy and sell high.

Dividends

This is income that is given by companies to shareholders. As employees earn salaries, shareholders get dividends. After every financial year, companies decide to give their shareholders a certain percentage of profits as dividends.

They share the dividends according to the number of shares one has in the company. If they are paying one Shilling per share and you have one million shares, you will receive 1 million as dividends for that financial year.

Companies do not give dividends always. They may decide to retain all profits and reinvest them for growth. Shareholders have nothing to lose because when the money is reinvested, it will earn them more profit in the future. It is all the same. It is just delayed gratification.

You have to differentiate between capital gains and dividends. You get capital gains after you sell your shares while you get dividends only if you do not sell your shares.

Capital gains are the profit (Revenue minus cost) you get after trading while dividends are what you get if you hold shares of a company and decide not to sell them.

Rental income

This is income that you get after leasing your property to a tenant. All of us are aware of it. Tenants pay rent every month to the property owner. To the owner, this type of income is rental income.

Rental income is a darling of many people who do not want the perpetual hustle of making investment decisions.

After all, you just need to build a rental building and hand it over to a good property manager. You can go to sleep and smile to the bank every end month. This is why it is so popular.

Before you get into this real estate business, it is good to decide what kind of building you want to put up. It may be a commercial building that people use for business.

It may be a residential building where people live or it may be mixed development which is a combination of the two. As businesses and economies grow, commercial buildings become more attractive than residential.

Always choose a good LOCATION to put up your building, a place that will attract high monthly rental payments. High-end neighborhoods are good in this case. The problem is, the land is also very expensive in these areas. You have to make a good decision based on your resources at hand.

Do not assume that houses will always be in demand because they are not always. You will visit buildings and find them empty. A multimillion structure that is not bringing any income.

It is important to do your research before committing to such a permanent and costly project. If you are not a sophisticated investor, you can invest in rental houses as you develop your expertise to invest in other risky investments.

Interest income

This is the income you get when you lend a person or institution money. It is what you get when you put your money in a bank account. This is not very appealing.

The returns are usually not attractive. This is mostly for people who want to save and invest later or people who have no business growing their finances.

Royalties

This is what you get through your intellectual properties. If you have a patent, a trademark, copyright, etc. you will earn royalties if someone else uses them to trade. For example, my books are my copyrights.

No one can edit, print, or sell them without my consent. If they trade with them, they have to compensate me because they are mine. This compensation is called royalties.

The same applies to ideas, songs, inventions, innovations, business names, and brands, etc.

In business, there is a concept called FRANCHISING. Franchising is using someone else’s business name to trade. In return, you pay them royalties from your profits.

If people do not want the hustle of building a business brand from scratch, franchising is a good way to go.

The franchisor has to be a business that has a good reputation in the market and with loyal customers. When you use their brand to trade, you pay them royalties every financial year. It also happens when governments give exploration and mining companies permission to mine in their country.

Those companies have to pay royalties. In short, royalties are paid when you use something that is not yours to benefit yourself.

As a source of income, you have to invent or create something to get royalties. Create a brand or a product that is so superior that other people will want to use it to make money.

It has to be unique and superior. Engage your CREATIVE part of the brain to come up with such an idea or product and then give it to people to use in exchange for royalties.

Conclusion

Those are the seven types of income. Aspire to have as many as possible on the list.  Wealthy people have different sources of income.

Although you may have your main source of income, maybe a business or a job, you can also get other sources to increase your chances of WEALTH CREATION. Among the 7 types of income, which one do you prefer?

All those sources are good but profits, royalties, capital gains, and dividends are better. They may earn you massive wealth if properly managed.

Salaries and interests are least desirable, only have them when you have no other option. Rental income is in between, you can have it especially if you want to retire or get less involved.

These 7 types of income will catapult you to massive financial success.

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