We all need money to build wealth, pay for things we want, and reach financial goals. Just like there are basic financial terms you should learn, there are multiple types of income to master as well.
Different types of income each have advantages and disadvantages, so you should have a brief understanding of each. If you’re interested in increasing your income to pay off your student loans, here are 3 types of income to grow your wealth.
1. Earned income
Earned income is any income that you produce through an activity based on your time and effort. This may present itself in the form of a full-time job with a salary, owning a small business, or even freelance work.
A huge benefit to earned income is that you generally don’t need any startup capital. You can get started today by getting hired for a job, selling goods online, or performing services on the weekends.
It’s often a stable source of consistent income, making it a very popular choice among college grads and other career-minded individuals.
There are however, a few downsides to earned income. The main one? You are indeed exchanging some form of time or effort for money. And once you stop working, you’ll stop receiving any monetary benefit.
Compared to other types of income, earned income produced within the United States is taxed at the highest rate. It can be as much as 39% of your income, not including state income taxes.
Thus, earned income is the most expensive kind of income you can earn. For this reason, it’s important to learn how to diversify your revenue streams and not rely on earned income as the sole source of funds.
2. Investment income
Investment income, also known as portfolio income, is generated from the buying and selling of investments or assets. The more assets you own, the higher return on investment you’ll have to generate portfolio income.
There are many different vehicles for investing, from simple savings accounts that earn a small interest to stock market investing. Here are some examples of investment income:
- Stock market investing, like stocks or bonds
- Interest earned, dividends
- Buying and selling real estate
- Purchasing other assets like art, antiques, and collectibles
Investment income carries some amount of risk and requires a good bit of knowledge to make a profit. Paper assets, such as those associated with the stock market, can be conservative or volatile forms of income.
You’re never going to have a lot certainty as to what the market will mean for your portfolio gains, therefore investment income is very unpredictable. You won’t have as much control over how much investment income you earn.
However, investments held over a year or more are considered long-term investments and are taxed at a much lower rate than earned income. Your investments could qualify for capital gains or qualified dividends tax rate versus the general income tax bracket.
You also have the benefit of earning compound interest (interest earned on interest) within your portfolio.
3. Passive income
Passive income is also known as unearned income because the money you make is created passively, or without much exchange of time and effort. Once the initial investment is made, whether that’s time or money you’ve put in upfront, the income venture continues to pay out with little to no future input.
For example, if you were to write a book and sell it to a publisher, you would continue to receive royalties on the sales of the book for many years without any additional work. Here are some popular types of passive income:
- Income from a rental property
- Royalty income from oil and gas minerals
- Pensions or settlements
- Creating and selling intellectual property
Passive income allows for the most favorable tax treatment. Similarly to investment income, you may be taxed at a lower qualified tax rate.
You can essentially reach retirement age and continue to earn money from previous passive income ventures, without having to worry about how to pay the bills. Many people consider passive income as the key to long-term wealth — and that’s something we should all ultimately strive for.
Your different types of income matter
Most college grads start their careers in the workforce expecting to earn an income for the rest of their lives, but this is not the only income stream you should strive to create. Learn to branch out and become your own boss, or invest in some real estate or intellectual property.
Don’t stunt potential income by limiting yourself to only one revenue stream. Make use of all 3 types of income and expand your revenue beyond just earned income. Doing so can help you pay off debt, build wealth, and reach financial freedom.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|