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If you read any financial literature, chances are you've come across the terms active income, passive income, and portfolio income. You might wonder what each of these terms means and which one is the best type of income, especially when it seems that there almost as many recommendations as there are authors. Here's the quick rundown:
Active Income: the income you earn from work you perform. It can either be an hourly wage or an annual salary, depending on the exact position. Generally speaking, if people ask you what you do for a living, you'll respond with your source of active income. Also known as 'earned income'.
Pros: You can make more money initially via active income than you could with passive income (that is, the income from the first month at a new job will be higher than your first month's profit from most passive sources). Also, you can usually raise your active income simply by working longer, which will result in more paid hours or possibly a raise.
Cons: You need to keep working to keep making money; if you quit your job or get fired, your income stream will dry up. (Also, it's been argued that the tax system favors other sources of income, at least here in America; but that depends a lot on your specific situation.)
Passive Income: the money that's earned which doesn't require your material involvement. Common examples are rental income on properties, royalties from books, and blogs (like the one you're reading now). Once the initial work to create them has been completed, the amount of money they earn is independent of the time devoted to them.
Pros: Your income does not depend on the hours of work performed. That is, once the book or website has been created or the rental property purchased, the income can grow independently of the time spent by the owner. As a result, it's possible to earn money in your sleep with such income sources.
Cons: Your income does not depend on the hours of work performed. The nature of passive income is a double-bladed sword. While it's true that you can conceivably earn much more money creating passive income sources than you could with active income, you can also spend time creating a website or buying rental properties that end up returning nothing (or even costing you money).
Portfolio Income: Sometimes considered a sub-section of passive income, portfolio income comes from monetary investments in things like stocks, bonds, and mutual funds. Usually, portfolio income refers more specifically to money generated in the form of dividends, rather than increasing prices (capital gains). Portfolio income involves using your money to make more money, by putting it into vehicles for financial growth.
Pros: Like passive income, portfolio income grows without requiring your involvement. Once you've put your money into a particular investment, the money can grow without you needing to do anything else at all. (Although, watching your investment in case things change is always a good idea.)
Cons: To generate portfolio income, you need money in order to start investing; you'll need another source of income to create your portfolio. Also, as the recent events have shown, there is a lot of volatility in the financial markets, and you have to have back up plans in case your portfolio does not perform as well as expected.
Which type of income is best? The answer to the question is, they all have their own uses as you create a stable financial future. Active income will help you generate seed money that can be put into your portfolio. Your portfolio will grow and build up, enabling you to get more portfolio income out of it. And passive income sources can be cultivated, providing you with supplemental money to put towards your financial goals. Combine the three, and you've got a full and bountiful garden, ideal for creating a solid financial future.
Showing posts with label basics. Show all posts
Showing posts with label basics. Show all posts
Friday, March 13, 2009
Friday, February 27, 2009
Three Things I Wish I Knew When I Was Younger
Yesterday, I wrote about all the things my mother taught me about money. She laid a good foundation for my financial success up to now, and her support and encouragement will no doubt serve me well in the future. The more I learn about financial issues, though, the more I wish I had received a broader exposure to money and investing while I was growing up. I sometimes feel like I'm trying to catch up to other people my age when it comes to financial knowledge and money management skills. (Although, as I've been hanging out on PF blogs a great deal lately, I might have a somewhat skewed view as to just how much the average twenty-six year old knows about good money traits.)
There are several points I particularly regret not learning sooner in my short life:
1) Invest early, invest often - When I started to look into managing my money more actively last year, one of the avenues I considered was investing. My mother, though, expressed numerous concerns with my plans. If I had been encouraged to start investing earlier, I could have a greater investment currently in place (although, given the latest market movements, perhaps it was good that I didn't have more 'skin in the game').
When I have kids of my own, I'm going to do what I can in order to spark an interest about money and investing in them. One specific plan I have is to match their Roth IRA contributions while they're in high school (and possibly college), in a sort of make shift 401(k). This will pass along several important lessons: start saving for retirement as soon as possible, using tax-advantaged accounts allows your money to grow, and when someone offers you free money, you should take it.
2) Network, Network, Network - One of my biggest problems finding a new job has been the lack of a network to utilize as I search. It's tough to find something when you can barely get your foot in the door. I'm hoping my luck will change soon, but at the moment, I wish I had built up a network of contacts before I left school.
I'm working to build up my network now, including planning to go to a few conventions and putting myself out in front of placement agents. I am trying to make friends and contacts in my field (and for that matter, in the world of PF bloggers). It's slow going, especially as I'm normally a shy, withdrawn person, but it's important that I have more contacts, in case I find myself in this situation again.
3) Take advantage of the Internet - Alright, this one is hardly my mother's fault; the web wasn't even invented until 1993, when I was already eleven years old. The idea of setting up a blog, putting up a few ads, and using that as a source of revenue is new enough that I'm not too surprised I'm only now getting started with it.
By the time I have kids, though, the internet revolution will have been in effect for more than a generation; while I won't claim to know what the future of computers will hold, I do know that my kids will need to understand them. I'm going to do my best to spur them to get online and figure out ways of making money, from blogging to producing static websites and other online 'side hacks'. Chances are, they'll be even more proficient at using the computer than me, so perhaps they'll end up showing old Dad a few new ways to make money online.
This is hardly a complete list of what I hope to pass onto my kids (and what I regret I didn't learn about sooner), but it's a decent start, and should inspire me to help my children grow and learn.
There are several points I particularly regret not learning sooner in my short life:
1) Invest early, invest often - When I started to look into managing my money more actively last year, one of the avenues I considered was investing. My mother, though, expressed numerous concerns with my plans. If I had been encouraged to start investing earlier, I could have a greater investment currently in place (although, given the latest market movements, perhaps it was good that I didn't have more 'skin in the game').
When I have kids of my own, I'm going to do what I can in order to spark an interest about money and investing in them. One specific plan I have is to match their Roth IRA contributions while they're in high school (and possibly college), in a sort of make shift 401(k). This will pass along several important lessons: start saving for retirement as soon as possible, using tax-advantaged accounts allows your money to grow, and when someone offers you free money, you should take it.
2) Network, Network, Network - One of my biggest problems finding a new job has been the lack of a network to utilize as I search. It's tough to find something when you can barely get your foot in the door. I'm hoping my luck will change soon, but at the moment, I wish I had built up a network of contacts before I left school.
I'm working to build up my network now, including planning to go to a few conventions and putting myself out in front of placement agents. I am trying to make friends and contacts in my field (and for that matter, in the world of PF bloggers). It's slow going, especially as I'm normally a shy, withdrawn person, but it's important that I have more contacts, in case I find myself in this situation again.
3) Take advantage of the Internet - Alright, this one is hardly my mother's fault; the web wasn't even invented until 1993, when I was already eleven years old. The idea of setting up a blog, putting up a few ads, and using that as a source of revenue is new enough that I'm not too surprised I'm only now getting started with it.
By the time I have kids, though, the internet revolution will have been in effect for more than a generation; while I won't claim to know what the future of computers will hold, I do know that my kids will need to understand them. I'm going to do my best to spur them to get online and figure out ways of making money, from blogging to producing static websites and other online 'side hacks'. Chances are, they'll be even more proficient at using the computer than me, so perhaps they'll end up showing old Dad a few new ways to make money online.
This is hardly a complete list of what I hope to pass onto my kids (and what I regret I didn't learn about sooner), but it's a decent start, and should inspire me to help my children grow and learn.
Thursday, February 26, 2009
Three Things My Mother Taught Me Financially
I give my mother a great deal of credit; she raised me and my two sisters essentially by herself, all the while working full time. She never let us feel deprived, alone or unloved. I'm proud of all her accomplishments and everything she has done.
Some of the most important lessons she taught me involved money. Between her actions in her personal life and what she explicitly told me, I learned a great deal about how to get a handle on my finances and keep my life in balance.
1) Control your spending - One of the first lessons I learned from my mother, I picked up simply by watching her in her daily life. She did spend money, but not on extravagances. She would buy food, resisting temptations of candy and sweets. She took us to the library, encouraging us to borrow books rather than buy them. She enrolled us in low cost after school activities, such as Scout programs, allowing us to socialize, learn, and grow.
All of these experiences that I observed helped to establish the idea of frugality in me. I still tend to keep my spending low, without even making much effort. Many of the tips I encounter about saving money, such as packing your lunches and resisting daily treats (like a Starbucks coffee) come naturally to me, all because of my mother's influence.
2) Save up for what you desire - When I was sixteen, I wanted to get a car. (Well, actually, my mom wanted me to get the car more than I did, so I could take my sisters to school and our other activities, but I still wanted it, as well.) Rather than simply buying me a car, my mother encouraged me to get a job, earn and save the money, and buy the car on my own. Thus began my employment at McDonald's, lasting long past when I actually bought my first car (a 1988 Aries, if I remember correctly; a pretty solid car, especially since I only paid $1000 for it).
From this, I learned that if you are going to make a big, expensive purchase, the best way to do so is NOT to charge it and slowly pay it off while accumulating interest; but rather, to work, spend less than you earn, save the difference, and eventually purchase the item outright. It has been a valuable, meaningful lesson for me, and I am glad I learned it without having to get overwhelmed by debt (as so many other people seem to have done, sadly).
3) Study hard and get good grades - My mother always stressed education. She encouraged us to work hard in our classes and take some of the harder courses. She pushed my sisters and I into the gifted program at our school and motivated us to stand out academically as much as possible.
This might not seem related to my finances, but it's had at least two important monetary impacts on me. First, my good grades and high SAT scores allowed me to start college without having to pay for my tuition, and by keeping my grades high allowed me to continue in the same fashion. I still had room and board expenses, but the savings enabled me to graduate with a relatively small amount of student loan debt, avoiding one of the major pitfalls of the recently graduated college student.
Secondly, that push to learn and study has stayed with me up to this date. As a result, I tend to be cautious, carefully, certain to learn as much as I can about something before jumping in. It is a good approach for many things in life, particularly when it comes to money and investing.
Almost all of my good money management traits are a direct result of my mother's influence.
This is not to say that my mother taught me everything I now know about money; in fact, there are some areas where I wish she had done more. I will cover those tomorrow.
Some of the most important lessons she taught me involved money. Between her actions in her personal life and what she explicitly told me, I learned a great deal about how to get a handle on my finances and keep my life in balance.
1) Control your spending - One of the first lessons I learned from my mother, I picked up simply by watching her in her daily life. She did spend money, but not on extravagances. She would buy food, resisting temptations of candy and sweets. She took us to the library, encouraging us to borrow books rather than buy them. She enrolled us in low cost after school activities, such as Scout programs, allowing us to socialize, learn, and grow.
All of these experiences that I observed helped to establish the idea of frugality in me. I still tend to keep my spending low, without even making much effort. Many of the tips I encounter about saving money, such as packing your lunches and resisting daily treats (like a Starbucks coffee) come naturally to me, all because of my mother's influence.
2) Save up for what you desire - When I was sixteen, I wanted to get a car. (Well, actually, my mom wanted me to get the car more than I did, so I could take my sisters to school and our other activities, but I still wanted it, as well.) Rather than simply buying me a car, my mother encouraged me to get a job, earn and save the money, and buy the car on my own. Thus began my employment at McDonald's, lasting long past when I actually bought my first car (a 1988 Aries, if I remember correctly; a pretty solid car, especially since I only paid $1000 for it).
From this, I learned that if you are going to make a big, expensive purchase, the best way to do so is NOT to charge it and slowly pay it off while accumulating interest; but rather, to work, spend less than you earn, save the difference, and eventually purchase the item outright. It has been a valuable, meaningful lesson for me, and I am glad I learned it without having to get overwhelmed by debt (as so many other people seem to have done, sadly).
3) Study hard and get good grades - My mother always stressed education. She encouraged us to work hard in our classes and take some of the harder courses. She pushed my sisters and I into the gifted program at our school and motivated us to stand out academically as much as possible.
This might not seem related to my finances, but it's had at least two important monetary impacts on me. First, my good grades and high SAT scores allowed me to start college without having to pay for my tuition, and by keeping my grades high allowed me to continue in the same fashion. I still had room and board expenses, but the savings enabled me to graduate with a relatively small amount of student loan debt, avoiding one of the major pitfalls of the recently graduated college student.
Secondly, that push to learn and study has stayed with me up to this date. As a result, I tend to be cautious, carefully, certain to learn as much as I can about something before jumping in. It is a good approach for many things in life, particularly when it comes to money and investing.
Almost all of my good money management traits are a direct result of my mother's influence.
This is not to say that my mother taught me everything I now know about money; in fact, there are some areas where I wish she had done more. I will cover those tomorrow.
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