Diversify Your Wallet

Income has always meant my salary. It meant the money that I would get paid from going to work 8 am to 5 pm, Monday to Saturday.

So all my life, my goal has been to study hard, get an education and get a good job. Find a husband that did the same, and our combined income could help to give me a comfortable life. I may even have enough to raise a family.

All my life, I was wrong.

When I started learning about money, I realized there was more to income than I thought. I couldn't believe that I never realized this even while holding a degree in accounting and graduating at the top of my class.

So how could I have worked towards something that I never knew existed? And how can you too?

Now that I know, I can choose the income I wish to work for, and I want you to be able to do the same. So read on and learn about the different types of income, the advantages and disadvantages and how to use them through out your life.

Three Types of Income

Earned Income

Earned income is the money you get from working a job or the profits from running your business.

Earned income is the income you pursue all your life. However, it can become problematic when you realize you can only increase it at a fixed rate every year. This rate is usually predetermined by your employer.

Those of you who have been with a company for a very long time, know that this is true. The only other way to increase earned income is to work more hours.

Don't forget that even if you do this, there is only a limited number of hours that you can work per day, week and month. Meaning you will eventually hit a a ceiling.

Also, remember that as you get older; your ability to work longer hours begins to decline. Your health takes a toll when you work longer hours.

If you are like most, your responsibilities outside of work also increase. When you are 40 years old, you need to spend time with family, friends, and loved ones who may not appreciate the long working hours.

Taxes on Earned Income

It's also important to consider that this income is one of the highest-taxed incomes in the world. In Belize, salaries endure a tax rate of 25% of your chargeable income.

(Note: Chargeable income in Belize is any money earned over Bz$ 26,000 from self or other employment.)

So once you start earning over a certain income threshold, you become less motivated to try and increase your income due to the taxes you must endure.

Portfolio/Investment Income

Portfolio income is income you make when you invest long-term into things like stocks, bonds, and cryptocurrencies. You receive this income when you sell the investments at a higher price than what you paid.

This income is commonly known as capital gains. It has zero relation to the number of hours you work. You don't receive any money from it until your investment is sold or matures.

With this income, you run the risk of your asset losing its value before you are ready to sell. It is considered a more long-term approach to income preservation and growth.

Taxes on Portfolio Income

In most countries, this income has a lower tax rate than earned income. In Belize, there is no capital gains tax. Meaning that the profits you get from any portfolio investment in Belize are tax exempted.

Passive Income

Passive income is a hybrid form of earned and investment income. It is especially important as you age.

Passive income is similar to earned income because you receive recurring payments over set periods, like a salary. However, the income that you receive no longer depends on the time you put in. Instead, it is determined by the capital that you invested.

Basic examples of passive income are rent revenue, interest, and dividends.

Taxes on Passive Income

Passive income often has a lower tax percentage than earned income. In Belize, taxes on passive income such as dividends is 15%. You can also reduce income on things like rent by including items like depreciation. When you do this it results in paying fewer taxes.

How and When to Strive for Different Income

Now that you are familiar with the three types of income, and their characteristics, you need to understand that they are all important but suitable for different areas and stages of your life.

Understand them so that you can determine where in life you are. Then you can start thinking about creating different types of income to ensure a more vital financial existence.

Understand that Earned income is usually the foundation for most people. However, remember that as you get older and your earned income increases, you should try your best to keep your expenses low.

If you do this, you will have more liquidity to move over to investment income.

Use investment income to grow your wealth, and start moving it into items that can help you to generate passive income as you continue to age. This will compensate for your ability to work fewer hours. It will also help you to maintain the lifestyle you like.

The challenge

This week I challenge you to figure out where on the income spectrum you are. Decide where you want to be, and begin to set financial goals and develop habits that will get you there.