what is the difference between earned income, passive income, and investment income?
What is the difference between earned income, passive income, and investment income?
Earned Income:
Earned income refers to the money you receive in exchange for the work or services you provide. It includes salaries, wages, bonuses, tips, and commissions. This type of income is directly correlated with the time and effort you put into your job or profession. Earned income is typically associated with active participation in a job or business activity. It is the most common type of income for most individuals who are employed or self-employed.
Passive Income:
Passive income is income that is earned with little to no ongoing effort on the part of the recipient. Unlike earned income, passive income does not require active involvement in a job or business activity. Instead, it often involves investments in assets that generate regular cash flow without the need for active management. Examples of passive income sources include rental properties, royalties from intellectual property, dividends from stocks, and interest from savings accounts or bonds. While passive income may require initial investment and setup, once established, it can provide a steady stream of income with minimal ongoing effort.
Investment Income:
Investment income is a broader category that encompasses any income earned from investments or financial assets. It includes both earned income and passive income generated from investments. Investment income can be derived from various sources, such as dividends from stocks, interest from bonds or savings accounts, capital gains from the sale of assets, and distributions from mutual funds or retirement accounts. Unlike earned income, which is directly tied to employment, and passive income, which often involves passive investment in assets, investment income encompasses a wide range of financial activities aimed at generating returns on invested capital.
In summary, earned income is the money you earn through active participation in work or business activities, passive income is income generated with little ongoing effort, often through investments in assets, and investment income includes all income earned from investments or financial activities, including both earned and passive income sources. Each type of income has its advantages and considerations, and individuals often aim to diversify their income streams to achieve financial stability and growth.