3 types of income explained

You might be surprised to learn how many different types of income sources there are. Some sources of income—like your paycheck—may be obvious to you. But you may not have thought about other income streams. Understanding the big picture could help you manage your finances. 

What you’ll learn:

• Three of the main types of income are earned, passive and portfolio.

• Earned income includes wages, salary, tips and commissions.

• Passive or unearned income could come from rental properties, royalties and limited partnerships.

• Portfolio or investment income includes interest, dividends and capital gains on investments.

• Knowing about different income streams could help you plan for your future.

In general, income is money you receive from working, providing a good or service, or investing. In other words, it’s any money you gain that you can put in the plus or revenue column of your budget. It’s also commonly measured in cash. 

Your paycheck may be the first source of income that comes to mind. But other types of income include:

• Tips and commissions

• Profits from selling goods or providing services

• Interest, dividends or capital gains on investments

• Gifts, allowances or inheritances 

• Government benefits and tax refunds

• Withdrawals from retirement or pension funds

There are different types of income. But three of the most common are: 

• Earned income

• Passive income 

• Portfolio income 

The main difference between them is in how you make each type of money.

Earned income is money you earn by working—either for yourself, someone else or a business you own. It’s also called “active income” because you actively perform a service for it.

If you work for a company—including a small business or a large corporation—your employer may pay you an hourly wage. Or your employer might pay you a salary. 

Earned income could also include bonuses and extra pay. For example, taxi drivers and restaurant servers can earn tips. And people who work in sales can earn commissions.

Gigs can be another option for earning income. People who want to be independent, self-employed or work a part-time job may want to consider gig work. These side hustles are often temporary or short-term jobs performing a single task on demand. Musicians, babysitters, freelance writers and delivery drivers are all examples of gig workers.

Passive income is considered money earned without actively working for it. That’s why it’s also called unearned income. Rental income and income from royalties and limited partnerships are some examples of passive income.

Other examples of passive income include:

• Alimony

• Child support 

• Unemployment benefits

• Social Security benefits

• Worker’s compensation

Portfolio income comes from your financial portfolio—a collection of your monetary assets. It’s also called investment income, which can include interest, dividends and capital gains.

Income can come from a bank or credit union that pays interest on account balances. For example, you can earn interest on savings accounts, money market accounts and certificates of deposit (CDs). Keep in mind that the amount of money you make in interest can vary.

You could also earn income by investing. You can typically invest in bonds, stocks and mutual funds. When you buy bonds, you’re essentially loaning money to a corporation or a government in exchange for them paying you interest on your money. When you buy stock in a company, you’re a part owner in that company, so you can share in its profits. Similarly, you can make money from mutual funds, which pool money from investors to make and manage investments.

Think of dividends as the payday on your investments. When a company makes money, it can pay a portion of its profits to shareholders. Corporations commonly pay dividends in cash. But you can also receive more stocks or other assets, such as property.

When you sell something for more than you paid for it, the difference is called your capital gain. With financial investments, you can earn capital gains when you sell a stock or cash out a pension fund whose value has increased since you bought it.

Learn more about different types of income with the answers to these frequently asked questions:

There are many different types of income you can earn. You can actively work for earned income, or you can let your money work for you in passive income streams. You might also earn income from interest, dividends and capital gains on investments.

The more you know about the different types of income sources, the better you can manage your finances.