Mastering Personal Finance
Don’t stay in bed, unless you can make money in bed.
— George Burns
There are many different ways to make a living.
The most popular method by far is a job.
But did you know there are six other ways to receive an income?
This post looks at the difference between them and why it’s a good idea to have more than one way of making money.
The great thing about income is that it is uncapped. Unlike living costs, which you can only cut so far, there is no ceiling to how much you can earn.
1. Earned Income
The money you receive from a 9–5 is known as ‘earned’ income. This is because you ‘earn’ the money in exchange for your labour.
An earned income is often referred to as a salary. The word ‘salary’ comes from the Latin for salt because the Roman paid their soldiers in the stuff.
2. Profit Income
‘Profit’ income refers to any money left over from selling a product or service after covering your costs.
For example, if you sell a painting for £150 and it costs you £10 in painting materials, and you price your time at £25 an hour, and it takes you two hours, then your profit will be £80 (£150 minus £70).
3. Interest income
If you lend money to a bank or individual, any income you receive is classed as ‘interest’ income.
For example, if you have money in a savings account, the bank will pay you interest on that amount.
Interest is measured in percentage terms. So if your bank pays 2% interest per annum and you have £100 in your account, you can expect to receive £2 in interest at the end of the year.
Just don’t go spending it all at once!
4. Dividend income
‘Dividend’ income is money you earn from owning stocks.
The company pays you a dividend from a portion of its profits. However, not all companies pay out dividends.
