7 Types of Income (And How to Use Them to Your Advantage!)

0:00Fourth of July savings are happening now at the Home Depot with select appliances starting at$398. Plus, get free delivery on appliance purchases of$398 or more, no membership required. Upgrade your kitchen with a modern and sleek GE profile refrigerator featuring hands-free autofill for the perfect pour every time. And make laundry day easier with two-in-one washer-dryer combo innovation that completes laundry in about 90 minutes. Shop top brand appliances now at the Home Depot. Offer valid June 17th, July 8th, U.S. only C-Store Online for details. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs.

0:36It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs. On this episode of the Personal Finance Podcast, the seven types of income and how to use them to your advantage.

1:24What's up everybody and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.co. And today on the Personal Finance Podcast, we're going to be talking through the seven types of income and how to use them to your advantage. If you guys have any questions, make sure you join the MasterMoney newsletter by going to MasterMoney.co slash newsletter. And don't forget to follow us on Spotify, Apple Podcasts, YouTube, or whatever podcast player you love listening to this podcast on. If you want to help out the show, consider leaving a five-star rating and review on Apple podcast, Spotify, or your favorite podcast player.

2:00Now, today, we're going to be diving into the seven types of income that are out there. And what I want to do is I want to show you how to use these different types of income to your advantage. See, most people, they rely on one income their entire life. They rely on their W-2 income or the income from their job their entire life. And it is one that can, if you do not use it properly, be one of the worst for building wealth. Now, a lot of people who listen to this podcast and what we teach you is how to use it properly to build wealth, but a lot of people out there do not use it the right way.

2:30Now, the wealthy, they have a few different streams of income. Now, I've heard five, I've heard six, I've heard seven. Honestly, I think those are just clickbait titles. For a lot of you out there, just having a few streams of income can be a really, really helpful thing to help you build wealth over time. Why? Because we want financial freedom. You want to stop relying on your paycheck every single month. You want to stop having to rely on going every single day into your job, fighting through traffic, getting to that cubicle, that job you hate. If you want to stop doing that, then we need to make sure that we can find other ways to earn income outside of just our day job.

3:04So today we're going to be breaking down those seven types of income, what they are, how they work, and how you can climb the ladder from trading time for money to being able to actually find different ways to earn more. Now, for those who understand wealth, they understand this simple concept that wealth isn't built by working harder. It's built by learning how money works for you. And so getting your dollars to work for you day in and day out is one of the most important things. Your money can work way harder than you ever can. And so once you understand this concept, then you can see that your money is going to outperform anything that you ever do.

3:37Now, each income type gets more leveraged, more tax efficient, and more passive as you go. And the goal is to stack some of these income types over time. Now, most of us are never going to have all these different income types. And so here's my goal today. I'm going to walk through the seven different types of income. And my goal is for you to be inspired. My goal is for you to have some ideas of maybe ways that you can earn more income and how they can help pay you for decades so that you can stop working. In addition, I'm gonna show you how everyday people can realistically move from one level to the next.

4:06Then I'm gonna teach you what each type is and how you can actually build that type of income if you are interested in it. And then lastly, by the end of the episode, you'll know where you are today and where you want to go, what you wanna do next, because we're gonna spark some ideas with this show. So this is gonna be an episode that I hope inspires you. I hope you learn a ton. I hope it brings you a ton of value. So without further ado, let's get into it. Now, the first type of income is the starting line. And this is your earned income. This is where you're trading time for money. Everybody has to start here.

4:37This is where everybody begins, unless you have really wealthy parents that are just handing you cash. We all have to start here. And this is a great starting point. Now, one thing I want people to note is before we even dive into all these other income streams, you can become tremendously wealthy just with earned income. If you know where to put those dollars, if you know how to manage that money, you can become very wealthy. Don't ever let anybody out there tell you that you cannot become financially independent if you have a day job. That is absolutely hogwash. It is absolutely ridiculous. I can't believe I just used the word hogwash, but it is absolutely ridiculous that anybody would ever say that you cannot build wealth based on earned income because you absolutely can.

5:18Now, what is earned income? This is money you earn by exchanging time for money. So maybe when you first get started, you work at your local grocery store or you look at a restaurant. Maybe you're a waiter or a waitress and you go out and you earn some money. You trade time for money. Then eventually maybe go to college, graduate from college, go get your first job and you are trading time for money. So this is the income that you get from a job, a salary, work or even self-employment. A lot of people who are self-employed actually still have to trade time for money. And so examples of this would be salary from a W-2 job or an hourly wage from a part-time gig or freelance writing, design, consulting, those types of things, or even a side hustle like Uber or DoorDash.

5:56Those are all earned income where you are trading time for money. Now, this is almost where every single person starts and it builds your foundational cash flow so that you can get your savings and investments going. It teaches you how to manage your money and you need this stage, but you don't need to stay here forever. Now, for most of you, I want you to have some earned income. I think it is beneficial and positive to have earned income in your life. Now, but just noting that if you don't want to do this forever, you don't have to. And there are other solutions. So how do you grow this earned income?

6:26Because most of us need to make sure that we are focusing our time and energy on growing this earned income to start. This is going to help us find other ways to earn income in the future. And so because of this, number one is we need to focus on skill stacking. I say this over and over and over again. The number one investment that you can make in yourself is learning skills that can create value. Why? Because value means that you're going to earn a lot more money the more value you possess. If you can help somebody become more efficient with their time, if you can help somebody make more money and increase their bottom line, if you can help somebody reduce costs, all of those are tremendous value to businesses.

7:08So learning skills like sales, learning skills like project management, learning skills like how to use specific tools, maybe AI tools or financial tools or other tools that are out there are going to help businesses tremendously. And so skill stacking is the biggest thing that you can do. Also, in some industries, certifications show that you have those skills. So if you're in construction, for example, there's a lot of different certifications based on different construction segments. So my in-laws own a bridge painting company. So in this bridge painting company, you can make a lot more money if you have different certifications.

7:42So in the painting world, there's something called like a NACE 1 certification, a NACE 2 certification. And each time you get one of those certifications, all of a sudden your hourly pay goes up because you have that. There's a lot of industries like that where when you have additional certifications, you can earn more. Maybe it is getting a graduate degree. Maybe it is having additional degrees out there. You just got to weigh the opportunity costs of each of these different things. And so first, having those skills that are gonna go a long way that nobody can take away from you is number one.

8:11And number two is getting those certifications that can help you with your day job to earn more. Now, the second way to grow this income level is to learn how to negotiate your salary. Negotiation is one of the first things that you should go through. So if you've never read the book, Never Split the Difference, great, great negotiation book. And I highly recommend everybody listening, read that book. It's by Chris Voss, who was an FBI negotiator. So he would do these high stakes hostage negotiations for the FBI. And it is fascinating some of the tools and things that he teaches you in that book.

8:42But really what he's doing is teaching you how to collaborate with someone else. He's teaching you how to communicate with someone else. And that's what a negotiation is. You need to communicate with your boss and say, hey, this is what I'm doing. I'm being upfront with you right now. I want to earn more money. I want to make more money at this company. And what I want to do is I want to take this company further. And so in order to do that, I want to bring value to this department. What can I do in this department over the course of the next six months in order to earn more money? You're going to have a conversation about this.

9:14Maybe they give you three, four, five things. Maybe it's taking on more projects. Maybe it's speaking publicly within the company. Maybe there's all these different things that you can do. Then at that point in time, you go out and start communicating with your boss every single month and updating them on the projects that you're working on and updating them on all the things that you talked about. And then by the time six months down the line, you go into your boss's office and you say, hey, we had this conversation. I did all the things that we discussed and we told you, hey, I'm doing these so that I can earn more money or get a promotion.

9:42Let's talk about it. And so that is where you come up with a collaboration to negotiate your raise. And so we have an ebook called How to Get a Raise. If you go to mastermoney.co slash resources, it's free, you can check it out. It goes through this exact system. Also in Master Money Academy, we are currently right now building out an entire course surrounding this on how to negotiate your salary. So really, really excited for that. Next is building multiple earned streams. So maybe you don't earn enough at your day job. Maybe you're a teacher or you're capped at how much income you can make. So you can go out and do some freelance work or a side hustle.

10:15Maybe you can tutor, do things like that, where you could earn more on the side. So maybe you have multiple earned income streams. That's fantastic. People who are married, you most likely, if you both work, have two income streams within that household. And so these are just different ways that you can grow those earned income streams. Now, skill stacking by far is the highest leverage point that you can have. And negotiating your salary is number two, because when you have those skills and you learn how to negotiate your salary, those two things are infinite to how much you can earn all the way up until you get capped.

10:42So your W-2 income can get capped at some point in time. most people aren't earning multi-million dollars of the W-2 income, unless they're the CEO of a company or something along those lines. And so for this, you get capped at some point in time. And so these other levels of income that we're going to talk about today help you remove that cap and blow the doors wide open so that you can earn an infinite amount if you want to. It just depends on what lifestyle you want and how much you actually want to earn. So we're going to jump into number two next. Now, number two is one of my favorite ways to earn an income, and this is profit income, meaning it is business ownership where you can use time plus systems and utilize leverage to earn more income.

11:23So profit is what is left after expenses when you run a business and or sell a product or service. And it's how entrepreneurs turn their efforts into scalable income. Now, there's a beautiful thing about this because what's going to happen is when it comes to profit income, at the beginning, a lot of people are still trading time for money. They're still doing things where they have to trade time for money before they can actually earn that profit and utilize leverage. So what are some examples of this? One could be something like an online business that sells digital products. One could be you have a consulting firm, or maybe you have an agency, meaning you consult other businesses on how to solve certain problems.

12:00Or you have an agency like a Facebook ads agency, or you have an agency that helps dentists increase their profit margins. Or you have an agency that goes out and helps implement AI in different businesses. There's so many different types of agencies out there. It is a very, very high profit business. Also, brick and mortar businesses. Maybe you own a gym or maybe you own a restaurant or you own a storefront. And so those brick and mortar businesses are another way that you can use this. Or maybe you own a subscription, a SaaS subscription that you sell to other people. There's so many different ways that you can earn profit income.

12:32And this is something I think a lot of people should focus on. So when we talk about the side hustles that can turn into a full-time income. Those are some great options for people out there where some of those are profit income, and then some of them are earned income. So number one and number two combined. And the bridge between active and leveraged income starts here with this profit. Because at first, profit income may be tied to your time. But the cool thing about this is with systems, people, and processes, this can become reliable where wealth creation accelerates dramatically. Now, here's the thing that happens is when you have this money, you have the opportunity to be able to build out systems that are going to help you leverage your time, energy, and money.

13:13And so here's how to grow it. Let's talk about this, okay? So first, you want to solve a real problem that people are going to pay for. Solving problems is how businesses thrive. And if you can learn a specific problem that other people are struggling with and or that businesses are struggling with, you can make a lot of money. And if it's a real bad problem, you can make a tremendous amount of money. There's a bunch of different examples out there. What is a problem that is out there? Let's start with a dirty job, okay? A lot of people in this country have a septic tank, and so they have a problem.

13:44Eventually, that septic tank is going to fill up. Most people don't want to solve that problem. Why? It's a dirty job. But if you decide that you want to solve that problem, you can make a tremendous amount of money by pumping out a septic tank. What is another problem? Well, a lot of people want to figure out, okay, how do I implement AI into my business? We've talked about this in past episodes. And so they don't know what to do. And if you know how AI works, you can help solve that problem. Think about the biggest companies in the world. What problems do they solve? And that, my friends, is where I want you to start, okay?

14:15So if you solve real problems that people will pay for, that is number one. Then here is how you increase your profits, okay? You build systems so the business can run without you. So at the beginning, you're trading your time for money. The business can't run without you. You have to be in the business. But eventually, you can hire people, and you can build out systems that help businesses run without you. So two great books on this topic. Number one is a book called The E-Myth. And The E-Myth uses the example of a bakery, where there is a woman who owns a bakery, and she's baking all the pies, and she spends all of her time and her energy at this bakery.

14:48She wakes up super early. She goes and bakes the pies. She leaves really late. She does all the books at the end of the night, and it feels like she never has any free time because what happened is she started herself a job. And so what she needs is leverage and systems. And so she decides one day, well, I'm going to create standard operating procedures, meaning I am going to create procedures that someone else can follow so they can do exactly what I am doing, but I don't have to be here anymore. And so you create these standard operating procedures, and now you can hire someone else to come into the business to do what you do.

15:21Well, now you can A, bake twice as many pies if you need to, or B, you can take some time off and get a little rest for once in your life. So those two things are very powerful. So the e-myth goes into that and then goes on how to scale. Second one is called traction. Traction is typically behind me. It's right there on the bookshelf. It is typically behind me there because it is a very, very powerful book that changed a lot of my businesses. What traction is, is it is a book talking about the same thing, standard operating procedures and how to create them. but also you are going and moving towards a vision, a vision that is in place that you have set up and you are gonna have a mission statement.

15:56You are going to have core values. There are so many different things that it goes into, but this is going to help you leverage your time to increase your income. And then once you have these profits coming in, you can reinvest those profits into growth. So more people are gonna help you gain leverage. More efficient processes are gonna help you gain leverage. Better equipment can help you gain leverage. There's a lot of different ways to reinvest those profits so that you can earn even more. There's also things like recurring revenue that you can build in. So you can build in subscriptions or memberships or retainers.

16:24There's so many different things that you can do. See, most millionaires didn't earn their way to wealth. They built out businesses and utilized leverage so that they can have ownership and that profit can turn into income for them later on in the line. And so this is something that you definitely want to look into if you are interested in business. Now, business is not for everybody. Your W-2 income is completely fine, but it is a great, great option for some people out there who really are passionate about business. Now, number three is one a lot of us should be doing, and this is interest income.

16:53So we really want to make some money while we're sleeping. So this can be from a number of different ways, but it is income generated from lending money to someone else. Now, whether you know this or not, you're actually currently doing this right now because it could be a bank, it could be a government, it could be an individual, and you're collecting interest in return. So this is interest income. Okay. So examples of this would be your savings account. So a high yield savings account would be a great one or your money market account. Those are examples of lending money to a bank. You lend your money to a bank, your bank will pay you interest back.

17:21Now, if you do this at Chase Bank or Bank of America or Wells Fargo, think about that. Your savings account at these big brick and mortar banks pay you back hardly anything. So getting a high yield savings account, at least you're getting three, 4 % interest back on your money. If you think about it, a traditional brick and mortar bank savings account that does not have high interest is a terrible deal. You're literally lending them money that they go and use and they send out for mortgages and all these different things. But instead, you get nothing back. Well, they make a ton of money back. So making sure you leverage through a high-yield savings account is really important.

17:52Another one is treasury bills or bonds. So with treasury bills, you are lending money to the US government and they are paying back interest. With bonds, you are lending money to the US government or a state government or a municipal government or a company, and they are paying you back for lending them that money. That is what the interest rate comes from. You can also think of this as CDs. You're lending more money to a bank and they utilize those CDs, lock those rates in, and then they pay you interest. Or there's things like private lending. So real estate loans or small business loans or all these different ways to earn some extra income coming back.

18:24Now, why does this matter? Because this could be your first taste of making money outside of your day job, outside of your earned income. And so while it's usually a lower yield, it usually doesn't pay as much as some of these other things, it is predictably passive. And so having some passive income sources can be a very powerful thing. And it's how the wealthy preserve wealth and generate cashflow. So a couple of cool things about this type of income is typically you can outpace inflation at least. So you're trying to at least outpace inflation is the number one goal when you have this type of income, some interest income.

18:53And or if you are lending money to private people, you want to at least get market rate of return. So you want to match the S &P 500. So let's say, for example, your friend comes to you and says, hey, can you give me$100 ,000 so I can go buy a rental property? If you have$100 ,000, you want to lend it to him? Fine. But the interest rate needs to be high enough where it makes sense because the tradeoff is you could put this into the S &P 500 or a total stock market index fund and not have to worry about it, not have to worry if your friend is going to collapse, all those different things. So you need to get a high enough rate of return that makes sense for you.

19:22Now, how do you grow this level of income? One is you start with those high yield savings accounts, those bonds, just get the ball rolling, start to earn some extra cash on your cash. Two is you can do things like laddering CDs, or you can do treasuries for consistent payouts. Both of those are great. Three is you can explore private lending. Like if you're really interested in private lending, I know some of you are, You have sent in emails based on being interested in that. We've done an entire episode on notes, by the way, real estate notes. And if you are interested in private lending, that could be an option for some of you.

19:51For me, I am not super interested in it right now. It is not something, a risk I want to take because there are better places to put your capital unless the interest rate is really, really high. And so that is where I would think through that a little more. Also, you can use tax advantage accounts like IRAs or HSAs to grow interest tax deferred. So you can think of interest income as kind of the base layer of passive income. It is low risk, low reward, but a steady stream that requires no effort to really set up. And so it's very, very passive. And at least every single person out there should be doing this in their high yield savings account.

20:23So that is at least something that everybody should have. So most of you should have some interest income getting started here. We're going to dive into number four next. All right. One thing I've learned from running multiple businesses is there's usually a gap between how you think work is getting done and how it's actually getting done. And we've had times where we thought we knew the bottleneck, only to realize later the real issue was somewhere completely different. That's exactly what today's sponsor Scribe helps solve. Scribe is a workflow AI platform trusted by 94 % of the Fortune 500.

20:57And Scribe Optimize turns real workflow data into decisions your AI strategy actually needs, automatically capturing how work happens across approved apps, surfacing inefficiency and opportunities with no interviews and no manual discovery and no extra work from your team, which is the key. And the live dashboard shows where work is happening, how much time it's taking and where the biggest opportunities are right now. It automatically discovers workflows across multiple tools, then highlights your biggest inefficiencies and gives AI-powered recommendations with estimated time-saving. You know I love saving time.

21:32It's also built with privacy in mind. It only runs across approved business applications, user-level data is anonymous by default, and sensitive information is automatically redacted and never leaves your firewall. To see, optimize in action, head describe.how slash PFP and mention PFP for a 30-day risk-free trial. That's S-C-R-I-B-E dot H-O-W slash P-F-P. This episode is brought to you by State Farm. Listening to this podcast instead of doom scrolling, smart move. Another smart move? getting help from one of State Farm's 19 ,000 local agents when you choose to bundle home and auto bundling, just another way to save with the personal price plan prices are based on rating plans that vary by state coverage options are selected by the customer availability, amount of discounts and savings and eligibility vary by state tomorrow morning is knocking stock your fridge now how about a creamy mocha frappuccino drink or a sweet vanilla smooth caramel maybe or white chocolate mocha Whichever you choose, delicious coffee awaits.