Types of Income - I

-
There are different types of income. Each income has it own advantages and disadvantages. We will go through each one of them, understand them and know what should be our best pick.

1. Earned income

90% of world population falls under this category. In this type of income you trade money for your time.

Advantages:

  • You will get steady paycheck.
  • Your Income will depend on how much value you bring to employed organisation.
  • There will be no risk of your capital.

Disadvantages:

  • This income is not scalable. Sure you can increase your expertise and earn more, but you got only 24 hours a day.
  • This income is safe till you are employed. If you got fired, you will lose the income.
  • This form of income is taxable highest. Hence your Gross Income will be less than your Net Income

2. Portfolio income:

In this type of income, money makes you money. Income from stocks, bonds, Mutual fund, fixed deposits comes under this category. Only capital growth is considered in this type of income.

Advantages: 

  • Anyone with few hundred rupees can start this type of income. There are stocks with even 50 paise to buy from(Penny stocks are not advisable to buy because they are illiquid).
  • This type of income is scalable.
  • Eighth wonder of the world(compound interest) can be seen in this type of income if you have long time horizon

Disadvantages:

  • This type of income is dependent on Market conditions. You will lose money even though it is not affecting your stocks you hold. Example: Trade war between US and China. India got nothing to do with it. But still indian indices are down. And the global pandemic of COVID-19 made governments to enforce lockdowns hence business was standstill.
  • You need large capital to start seeing the fruits of this income stream or you need to wait long with moderate capital to see the results (if you pick right stock or mutual fund)
  • There is risk of losing capital

3. Rental income:

This type of income is from assets. Holding of assets make you money. Example: house, car, stocks(Dividends) etc with which you can generate money.

Advantages:

You will have cashflow, with which you can buy more assets thereby having multiplyer effect.
It is as passive as it can get. You can see difference between activite income and passive income here.
You can use leverage on the assets to get loan from banks.

Disadvantages:

You need large upfront capital to build an asset.
There will be costs like maintenance, property taxes, insurance (if you have opted) on the property you hold.

Click here to continue reading on different types of income

Comments

Post a Comment

Popular posts from this blog

Evolution of Money - Barter system

-
Image
As Humans have evolved over time, Money we transact in exchange of goods or service is also evolved. We will see in detail why was there need to go other system. Barter System: Barter System was in use as early as 6000 BC introduced by Mesopotamia and it was improved by Babylonian's. Bartering is trading services or goods with another person when there is no money involved. If you ever traded 'abc' object in return of 'xyz' object, you have bartered. Advantages: You dont need money to barter. you do not have to part with material items. Instead, you can offer a service in exchange for an item It is flexible. Anything can be traded for anything.  Disadvantages: The desired item only has the value in this medium of exchange. For example, you desired to have apple, you will transact only with the person who is willing to exchange apple. Item exchanged is not quantifiable. Example: 10 apples cant be traded for a single sheep/goat. It was long tedious process
Read more

How much you should earn for every 100 rupees you spend

-
Image
You might be wondering what is this article about. Common sense says that we need to earn 100 rupees to spend 100 rupees. This is not the case and banks and government trying their best to hide this from us. Remember, you will not keep everything you earn. This is not as straight forward as it seems. Let us know about this with a tasty example 😉. Imagine we need to buy an Ice cream which is of 100 rupees. Let the gst on that ice cream be 18%. So now the total cost of ice cream is 118 rupees. Let us imagine that we fall under 20% Income tax bracket. So for every 100 rupees you earn you will only keep 80 rupees of it and rest 20% will be deducted as Income tax. 100 rs x 80% = 80 rs Remaining amount = 118 rs - 80 rs = 38 rs For the remaining amount we need to divide by 80 and multiply by 100(because 100 after tax is equivalent to 80) which will result in 47.5 Now add this to initial 100 rs So there it is for you. To spend 100 rs you need to earn 147.5 rs
Read more

Evolution of Money - Coinage

-
Image
Bronze age brought world of opportunities to human race. Sophisticated tools made his day to day task easy. Humans were on a journey to make things simple. Out of that quest, Coins were brought to life. Chronology of Coins and its usage: Money in the form of small knives and spades made of bronze was in use in China during the Zhou dynasty, with cast bronze replicas of cowrie shells in use before this. The first manufactured actual coins seem to have appeared separately in India. The first ruler in the Mediterranean known to have officially set standards of weight and money was Phedion.  Minting occurred in the late 7th century BC amongst the Greek cities of Asia Minor, spreading to the Greek islands of the Aegean and to the south of Italy by 500 BC. The first stamped money (having the mark of some authority in the form of a picture or words) can be seen in Paris. Advantages of Coinage: This system solved all the problems of the barter system With coinage, now individuals c
Read more