Colin is a writer who lives in New York City with his wife and children. He’s spent more than a decade as a financial journalist. He spent another decade working with financial institutions to turn deeply complex topics into compelling stories, making infographics and firmwide white papers for BlackRock, scripted and unscripted videos for the New York Stock Exchange and Bank of America, and podcasts for Charles Schwab. He has written short fiction for Facebook, The New York Times, and more. His novels, scripts, and films have won multiple awards.
As a 30+ year member of the AICPA, Nancy has experienced all facets of finance, including tax, auditing, payroll, plan benefits, and small business accounting. Her résumé includes years at KPMG International and McDonald’s Corporation. She now runs her own accounting business, serving several small clients in industries ranging from law and education to the arts.
The three pillars of income: earned, investment, and passive.
Photo illustration EncyclopĂŠdia Britannica, Inc
What is income? On the surface, the answer is simple: Income is any money you receive. And itâs essential to your financial well-being, from paying your bills to funding your goals to building your retirement nest egg.
Even with substantial assets, your savings can shrink over time if you donât have income to offset your expenses.
Key Points
Earned income includes wages, salary, tips, and commissions.
Investment income comes from selling something for more than you paid for it.
Passive income is generated from something you own, without having to sell it.
Income may bring to mind a paycheck, but there are many other ways money can flow into your life:
Just as there are different types of income, there are different ways to categorize it. The Internal Revenue Service (IRS) broadly categorizes the money individuals make as either income or capital gains. But other systems use more detailed breakdowns, sometimes separating income into six or more categories.
Income can take many forms, but it often falls into three broad categories: earned, investment, and passive.
1. Earned income
Money you receive from work, typically paid in the form of a paycheck.
Common sources
Salary and wages: Fixed or hourly compensation from an employer for work performed
Tips and commissions: Variable income based on sales or service
Bonuses: Extra pay tied to performance or company milestones
Shifts to investment income if you eventually sell the asset thatâs generating the payments
Generates ongoing income with limited involvement, depending on the asset; dividends or royalties typically require less upkeep than rental properties
The bottom line
Each type of income plays a different role at various stages of your financial life. When youâre starting your career, earned income covers daily expenses and helps you begin building wealth. Over time, investment and passive income can provide additional stability and support long-term goals such as retirement. Understanding how these income types workâand how theyâre taxedâcan help you make more informed financial decisions.
