Your long term wealth building strategy should be a based on a combination of four actions taken consistently that I would describe as the "four pillars of wealth building" and they include:
The four pillars of a solid wealth building strategy
- Reducing your expenses (debt, living expenses etc)
- Budgeting properly
- Increasing your income
- Putting your money to work for you the right way
This blog post focuses on #3. Increasing your income allows you to pay off your debts faster, save more and invest more. It can greatly accelerate the time it takes for you to accomplish your financial goals so much more than if you were just solely focused on reducing your expenses.
So let's talk about the 3 types of income and different avenues through which you can increase your income and accelerate your wealth-building journey.
The 3 types of income
You can earn income in one of 3 ways and they are:
- Active income (also called earned income)
- Passive income
- Portfolio income
1. Increasing your income through active income streams
Active income is defined as the income you receive for performing a service or for trading your time for money. The money you earn from going to work for an employer or working in a business every day is a form of active income because you are trading your time and your services for the money you earn.
Specific example of active income includes your paycheck, commissions, bonuses, and tips.
You can increase your income through active income streams in the following ways:
- Getting a better paying job in exchange for your time and skill
- Getting a part-time job in addition to your full-time job
- Starting a side hustle or full-fledged business
- Increasing the prices you charge in exchange for your time and services if you are a business owner
Check out these popular work from home jobs here as a way to add on a part-time or even new full-time job!
2. Increasing your income through passive income streams
Passive income is defined as income your assets earn for you without you having to exchange your time or services for it i.e. your active participation is not required and is commonly associated with real estate or business. For instance, receiving rent from real estate each month where no major effort has taken place for you to earn that money is a type of passive income.
More specific examples of passive income include royalties, interest income paid on bank account balances, network marketing, affiliate marketing income and other types of business income.
You can increase your income through passive income streams in the following ways:
- Putting in the initial groundwork to add a passive income element to your business. For instance with an eCourse or automatically delivered service or product (e.g. a book on Amazon) that does not require you to be involved.
- Become an affiliate for a product or service that you share with your network or audience base but the service delivery is provided by a 3rd party and you simply earn money for your referrals.
- Investing in rental real estate and charging rents that not only cover your expenses but net you a profit.
- Peer to peer lending (P2P) where you earn interest on the money you loan to others.
3. Increasing your income through portfolio income streams
Portfolio income is income that you earn from your investments. For instance, the money you earn from selling stocks in your stock portfolio at a profit is considered portfolio income.
More specific examples of portfolio income include interest, capital gains, dividends, and royalties.
You can increase your income through portfolio income streams by investing in company stocks, bonds and various types of stock market funds with the goal of having your investments grow over time and in turn earning you portfolio income.
Having a combination of these different income streams and ideas in place is a great idea. Not only will you have multiple streams of income (the average millionaire has 7), you'll also have a nicely diversified portfolio.
It is also important that with every income stream or investment you pursue, you do your research in advance. This way you are well aware of what you are getting into including any associated risks.