4 Types of Income and Why They Are Important

Money is a fundamental component of society. With it, we purchase the things we need and want, and save up for the things we hope to have some day. Most of us sacrifice our time and energy to earn income to make ends meet each month, but could we be earning different forms of income too?

Below are 4 of the most common types of income and how they are earned:


1. Wages

Perhaps the most common form of all income is wages. This is the money that a person earns for working a job that pays a certain amount of money per hour. Furthermore, the more time a person works the more wages they earn. This type of income is earned by employees that are considered “non-exempt”. These types of employees are entitled to overtime pay for all hours worked after 40 hours per week.

Wages are typically paid to workers on a set schedule such as weekly, bi-weekly, semi-monthly, monthly, or annually. Additionally, it is common for taxes and benefits to be withheld from this income stream. The most common ways that this type of income is provided to workers is through paper checks and direct deposit.


2. Salary

Like wages, salaried income is earned for working a specific job. Unlike wages, these types of jobs typically require higher level thinking and education. Salary income is paid-out on a set schedule, typically bi-weekly, semi-monthly, or monthly based on an annual amount disclosed in a contract. Compared to wages, salaried workers do not get paid extra for working more than 40 hours per week and they do not get paid less for working 40 hours per week. Another term for these types of income earners is “exempt” because they are exempt from overtime pay.


3. Interest

Perhaps the easiest and most important form of passive income is interest! Just as the word “passive” implies, interest on your investments earns you income without you having to lift a finger or log an hour. Easy ways to earn interest is to keep your emergency short term savings in a high-yield savings accounts. The longer you keep your money in the account, the more money you will earn in interest. Interest is such a powerful passive-income stream that has withstood the test of time.


4. Investments

Perhaps the most talked about source of income is investments. Investment income can be earned by depositing money into a certain type of account or by buying stocks/shares of a company. When it comes to depositing money, the most common types of investment accounts include 401k retirement accounts, IRA retirement accounts, Certificates of Deposit (CD) and Savings Bonds. When it comes to buying shares or stocks your best bet is to get involved in the stock market. Although the stock market can seem overwhelming, research shows that simply investing in Index Funds can yield more than a 9.00% annual return on your money compared to the average 1.00% return with a typical savings account.



While you are likely earning income from wages or salary, are you also earning it from interest or investments? Finding ways to earn income in all four categories will not only increase your bank account balance, it will also expand your financial freedom, and likely improve your mood too!



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