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22 Different Types Of Income & The Advantages Of Each

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WANT TO EARN EXTRA MONEY?

You’ve heard the saying: Don’t put all your eggs in one basket. If you drop the basket, or if you bet everything on one stock and it tanks… Well, you get the point. Failing to diversify can be dangerous. You know that when it comes to investments.

But is more than 80% of your total income from just one job or one business? That lack of diversification can be dangerous too.

My wife and I have lost jobs. We watched our $10,000-per-month business drop to $90 monthly. Stuff happens. Fortunately we aim to have multiple sources of income.

For example, in 2018 we made money from freelance writing, websites, stock dividends, bank bonuses, and more.

No one source represents more than 30% of our total income, so we’re not in too much trouble if one of them fails. You can see the advantage of income diversification.

But how do you choose which ways to make money? It’s personal. For example, I think jobs and regular businesses can be great, but I’m not particularly suited to either.

Each method of making money has advantages and disadvantages which have to be weighed according to your own situation. So let’s take a look at some various types of income you might consider, and what each one offers, starting with the most common…

1. Employment Income

When most people think of making money they think of jobs, and that’s not a bad start. The advantages of employment include:

  • A regular paycheck
  • Experience that helps you get the next (better) job
  • Can be used to learn what you need to start a business
  • Less stress than some other ways of making money
  • Possibly less risk than starting a business

A second job can provide an income cushion, fund a large savings account, and provide some income security (you’re not likely to lose both jobs at the same time). To really take advantage of a job see my post on 15 Ways To Use A Job To Make Money.

But jobs have some serious disadvantages too, which include the following:

  • You can be fired
  • You only make money when you’re working
  • Your income is lost if you have a serious illness
  • You may have to compromise your values
  • Your income is limited

To avoid those problems you might prefer…

2. Business Profits

Fixing cars, building websites, farming — perhaps there are too many kinds of businesses to lump them all together as one “type” of income. But there are some common advantages they share, like these:

  • You can’t be fired
  • You decide how things are done
  • Your income is (at least theoretically) unlimited
  • Money comes in even when you’re not working (in many businesses)

Of course, with most businesses there are also a few crucial disadvantages versus other ways of making money, such as…

  • As owner you have all the responsibility and stress
  • You have all the liability (although you can limit this)
  • High degree of financial risk versus a job

As to that last item, a business can be risky, but it doesn’t have to be. To limit the financial risk see my previous articles on businesses you can start for $100, and how to start a business with absolutely nothing. And if you want to keep it small and less risky, consider….

3. Freelance Work

Whether you’re working as a life coach, writing code for clients, or creating and selling book covers on Fiverr, freelance work is different from a “regular” business. The advantages?

  • You work when you like
  • You choose the kind of work you do
  • You choose the people you work for
  • You can usually fit the work in around a job schedule

I enjoy freelance writing for websites. Thanks to good clients I have very little stress. But there are definitely some disadvantages to freelancing. For example…

  • You’re the whole business; all the work is yours
  • Income stops when you stop working – just like with a job
  • Your income is limited (see both points above)
  • You have to continually market yourself and your skills
  • You pay higher taxes than on job income

For all of the disadvantages, you might like the flexibility of freelancing as a secondary income. You can usually fit freelance work into a busy and/or unpredictable schedule. For ideas on where to begin, see our post on “10 Places To Get Started As A Freelancer.”

4. Tax Free Income

Who doesn’t want to avoid taxes? The advantages of untaxed income are clear:

  • It’s worth 10% to 40% more than taxable income (depending on your tax bracket)
  • It often requires less tax reporting paperwork

There are no disadvantages to tax-free income, other than what comes with the specific ways of generating it. For more on this, see my article; “10 Sources of Tax Free Income.”

5. Manufactured Income

“Manufactured income” comes from “manufactured spending” and related strategies. For example, last week I bought two $100 Visa gift cards at Safeway, which cost me $196.90 during their $15-off sale. I used a credit card that earned 5% cash back at grocery stores, earning me $9.84. I used the gift cards to buy a $199.12 money order at Walmart (exactly $200 after the $0.88 fee), and deposited that into my checking account.

Bottom line? I made a profit of about $12. Here are some of the advantages of playing these kind of money games to manufacture income:

  • It’s fun (I enjoy it)
  • Money can be made during regular shopping and banking trips
  • The money is often tax free

To the last point: The example given is taxable income because there’s an actual profit, but most cash-back from credit cards (including big signup  bonuses) is considered a discount or rebate on sales, and so is untaxed. But there some disadvantages to this type of income…

  • It’s limited (a few hundred dollars monthly if you’re really good)
  • It can be time-consuming
  • You might feel guilty taking advantage of credit card companies and other large corporations

Okay, no guilt here. If you want to give this a try I have two previous posts for you to read:

6. Bank Account Interest

Put your money in the bank and collect that interest! Finally interest rates are rising enough to make bank accounts interesting again. The advantages…

  • Safety; FDIC-insured bank and credit union accounts are covered to $250,000
  • Easy (perhaps the easiest way here to make money)

But then there are the disadvantages…

  • Rates are still relatively low versus other investments
  • You have to monitor and switch accounts to get the best rates

I’m getting 2.35% annually on a regular online savings account at the moment. There are some rewards checking accounts that pay up to 5%, but they have limits and monthly requirements (like using a debit card a certain number of times). A list of the best current bank accounts will show you what’s available in your area.

7. Stock Dividends

Dividend-paying stocks let you make money whether or not stock prices go up. Consider Pitney Bowes (PBI). Buy it now at $8.20 and it might return to $14.00, where it was about a year ago, but in any case, the current yield is 9.35%, so you’ll make good income while you wait (this is not meant as a recommendation).

The advantages of income from dividend-paying stocks:

  • Regular, fairly predictable payouts
  • You can also make capital gains from stock price increases
  • You can come out ahead from the dividends even if the stock price drops
  • You can easily invest from the comfort of home

I’ve happily sold losing stocks after making much more than the losses from dividends. But there certainly some disadvantages to consider…

  • Dividends can be reduced or eliminated
  • Stock prices can fall and never recover
  • This investment is less liquid than a bank account
  • Some of the best dividends come from companies that are growing slowly, so you may not see much in the way of capital gains from higher stock prices

8. Rental Real Estate Income

My wife and I have been landlords several times, and we have never enjoyed it, but we did well financially, and there are some real advantages to making money this way, including…

  • A fair amount of control of your investment
  • The returns can be good
  • Rents (and your profits) rise with inflation
  • Real estate income gets special tax breaks
  • You have the opportunity to make a profit when you sell

The tax benefits of real estate matter a lot less now that our income is lower (something to keep in mind), and there are some serious disadvantages to being a landlord, like…

  • Tenants can be a hassle (to put it mildly)
  • Income can be irregular (tenants move or stop paying)
  • There are big surprises (like the sudden need to replace a $4,000 air conditioner)
  • You can lose money if you buy and/or sell at the wrong time
  • The accounting is a hassle

There are, of curse, many other ways to make money from real estate, one of which is included in the following category…

9. Various Online Investments

There are many ways to invest without leaving your house. For example, I invest in online REITs (like Fundrise), which pay dividends of 6% to 8% and higher based on the real estate income they produce. I also use the Lending Club platform to invest in personal loans, and I’ve made 5% or more (with bonuses) on Veteran Business Bonds, which are backed by business loans to veterans.

The advantages of these online platforms and investments include…

  • You can set up streams of income while lying in bed with a laptop
  • After your initial vetting process there is little to do
  • The returns are much better than bank accounts

And the disadvantages? Here are some of them…

  • Online investing platforms are riskier than banks (no FDIC insurance)
  • Many investments require multi-year commitments
  • Tax reporting can get complicated

Nobody can explain to me how to properly report income and loan write-offs from my Lending Club account — one of many reasons I’m winding down my investments there. But in general I love the many streams of income I can develop by investing without leaving this bed (yes, that’s where I write).

10. Room Rental Income

In my article on “How to Pay Off Your Mortgage by Renting Out Rooms” I explain how I did exactly that. Renting rooms in your home is not the same as traditional landlording. For example, it has these advantages:

  • The laws and regulations are less restrictive
  • You know your tenants and so can predict collection problems
  • You live with tenants, and so can monitor them
  • The investment needed is often zero (if you already own a home)
  • The income can be substantial (I did $10,000 one year from mobile home bedrooms)

There are, of course, some real disadvantages to making money from room rentals, like these:

  • You have to live with people (even strangers)
  • Some communities will not allow room rentals
  • You’ll have many of the same problems as regular landlords

11. Money-Making Project Profits

One thing I don’t like about jobs and businesses is that they never seem to end. But I like money-making projects, because they have a clear beginning and end.

For example, consider account-opening bonuses from banks. Open an account, meet any requirements, get a bonus of up to $400, and close the account. I did 12 of these projects in 2018 and made a total of $2,800 from bonuses. See my bank bonus post for more on this.

Sometimes I’ll take advantage of casino promotions to make money. For more on that see my post on 10 Ways To Make Money At A Casino Without Gambling.

“Project investments” can be made on a platform like Groundfloor, where I’ve made 9% to 14% returns investing in hard money loans that have a payoff date of no more than one year out.

The possibilities are endless. I’ve bought and sold cars, made dozens of walking sticks to sell all at once wholesale, and flipped houses. The advantages of these and other projects include…

  • No long-term commitment
  • High returns on invested money and time
  • You can complete a project whenever you have the time
  • Quick return of capital so other opportunities can be pursued

And the disadvantages?

  • Limited profit and income potential
  • You have to keep looking for new opportunities

12. Cash From Selling Your Stuff

Selling your things is a way to raise cash fast, and it’s a subject I covered in my A-to-Z guide on “How To Sell Everything You Own.” As an income source the advantages are pretty limited:

  • Fast cash
  • An opportunity to get rid of excess possessions

The disadvantages are clear:

  • The money you raise is limited by how much stuff you have (and don’t need)
  • This is pretty much a one-time deal (until you accumulate more stuff)

13. Welfare

There are a variety of welfare programs administered by the US government and the states. If you qualify, why not accept the help? Even the non-cash programs, like food stamps, replace expenditures you would otherwise make, making them the same as having another source of income. The advantages of welfare:

  • Free money (or goods and services that save you money)
  • Regular income
  • Not much to do other than paperwork

The disadvantages:

  • You have to have a low income to qualify
  • Programs can change or be canceled
  • You have to worry about losing the benefits if your income rises

14. Social Security Disability Payments

If you’ve paid into social security and you become injured or have a serious illness, you might qualify for SSDI (Social Security Disability Insurance) payments. If your disability is permanent you can receive these payments for the rest of your life, which brings us to our first advantage of this type of income…

  • Consistent, reliable monthly income
  • Can be substantial (based on your social security contributions)
  • After some time you can qualify for Medicare as well (at any age)
  • Unlike welfare programs, you can earn a fair amount without losing the benefit

You can have earned income (job or business) of up to $1,180 without losing your monthly benefit, and there is no limit on investment income. The disadvantages of SSDI include:

  • You have to carefully report any changes in income
  • You lose the benefits if you earn too much

15. Creator Royalties

I just got a royalty check for a book I wrote, like I have every six months for the last seven years. Apart from book income, you can get royalties from writing songs, licensing your inventions, and other creative works. The advantages of creator royalties include:

  • It’s an interesting way to make money
  • The money can keep coming in for many years
  • Royalties usually don’t require any additional work after a certain point

The disadvantages:

  • You may make nothing (if nobody publishes your book, buys your invention)
  • Income usually drops quickly over the years (my last 6-month check: $200)
  • You have to file a Schedule C and pay self-employment taxes

Creator royalties (unlike “royalties” from investments like oil and gas) are business income, so you pay ordinary tax rates plus self-employment income. Fortunately, the income can be offset by business expenses like internet service and computer purchases (assuming they’re needed for your creative efforts).

16. Treasure Hunting Discoveries

Treasure hunts are start-and-finish adventures, so they’re a kind of “money making project.” But the adventure aspect makes this income source different. I’ve actually found a hidden treasure chest, but the variety of opportunities goes way beyond such typical “treasure.”

Here are some previous posts that will give you some ideas for treasure hunts:

The advantages of making money this way? Here are some of them:

  • No long-term commitment
  • You can go treasure hunting whenever you have the time
  • Minimal investment to get started (unless you invest in expensive trips and tools)

And the disadvantages?

  • Limited profit potential (unless you make a big score)
  • You have to keep looking for new treasures

17. Social Security

The big decision here is whether to take your social security early or wait as long as possible to get a bigger monthly check. CNN has a nice guide to Social Security to help you answer that and other questions. Early or not, this retirement income has clear advantages over other types of income, like…

  • A predictable monthly check for life
  • Indexed for inflation

The only disadvantage that comes to mind is that you have to wait until you’re old enough to tap into this stream of income.

18. Private Pensions

A private pension from an employer is great if you can get it, and there’s an IRS online interview that will tell you if your pension is taxable. The advantages of a private pension include:

  • You can collect your pension in addition to any other retirement checks
  • It may be untaxed or taxed at a low rate

The disadvantages:

  • The pension plan may fail
  • The income may be at least partially taxable

19. 401k Distributions

There are a lot of rules for 401k plans, but basically you pay no taxes on the contributions (up to $18,500/year) and then pay taxes at your normal rate when you start collecting distributions in retirement. The advantages:

  • Big tax savings if you’re in a high-rate bracket
  • Lower tax rate if you’re income is then reduced at retirement

You can also make money from your employer’s matching contributions. For example, although I had no intention of keeping my 401k plan at a job I was soon leaving, but I contributed 3% of my income because my employer matched contributions dollar-for-dollar up to that amount. When I quit, I cashed in the $1,200 or so in the plan, of which my employer had contributed $600, and I paid the $120 IRS penalty (10%), leaving me $480 ahead.

401k plans do have some disadvantages, including…

  • Employer-based, which can get complicated if you get a new job, start a business, etc.
  • Management fees are higher than just investing in low-fee mutual funds
  • Your money is tied up until you retire

20. Traditional IRA Distributions

A traditional IRA is another way to set up a stream of income for later in life. It has these advantages versus other income sources:

  • You contributions are not taxed, thus lowering your total tax bill
  • You have more flexibility in investments than with a 401k

But there are disadvantages…

  • Contribution limits are lower ($5,500/year) than with other retirement plans
  • Your money is tied up (or penalized) until you retire

21. Roth IRA Distributions

A Roth IRA is very different from a traditional IRA, primarily because you get no tax savings upfront, but then pay no taxes on distributions. The advantages:

  • You have a lot of flexibility with the investments allowed
  • No worries about rising tax rates since distributions are untaxed

The disadvantages:

  • Contribution limits are lower ($5,500/year) than with other retirement plans
  • Your money is tied up (or penalized) until you retire
  • You are fully taxed on contributions

22. Lifetime Annuities

A lifetime-income annuity is what Investopedia calls “The Instant Pension Plan.” Basically you hand over a large chunk of money and get set payments for as long as you live. Here are the key advantages to this kind of income:

  • Predictable guaranteed income for life
  • No market risk

In regards to the latter, Investopedia points out that, “in the recession that began in 2007, stock market investors saw declines of 40% or more and some bondholders saw their investments reduced to pennies on the dollar. Annuity investors got paid in full, as advertised and as expected.” That’s great, but there are some disadvantages too:

  • You need a large amount of money to create a decent income
  • Annuities can be complicated and hard to understand
  • The insurance companies that sell these products can fail

As for the latter risk, you might split your nest egg into several lifetime-income annuities with different insurance companies, just to be safe.

Putting It All Together

Maximum diversification is a great idea, but you may only have time to develop a few types of income. Choose carefully according to your own situation, and aim for something like this basic three-part goal:

  1. Develop several income sources of different types
  2. Make 40% more than you need to survive
  3. Have no source be more than 40% of your total income

Set things up like that and even if your best source of income fails you’ll be able to pay the bills. And if one of the lesser sources fail you’ll still have more than you need while you look for a way to replace that stream of income

How many types of income did you have in the last year? Please share your stories with us below … and keep on frugaling!

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