Types of income There are two broad types of income – earned income and passive income. Earned income: This is the income type most of us are familiar with – earning a salary. For many, this is the only way they know. With earned income, you are working for money – essentially trading your time (life) for money. Earned income is essentially ‘no work no pay’. When you stop working, you stop earning. You are only rewarded for your labour. You cannot hire someone to do your work. You have to do it by yourself. You cannot transfer your job to your son or daughter. Your job is not your personal property. If you own a business which pays your salary, this is still classified as earned income. You are still an employee, except that you work for yourself aka self-employed. If you don’t show up for work, the business suffers and income goes down. Passive income: Passive income is an exact opposite of earned income. With passive income, you don’t work for money, your money works for you. You are not trading your life for money, but money for money. Your money does not have working hours. It works 24/7 including weekends, public holidays and during force majeure (strikes / civil disturbances etc). It does not go on vacation or call in sick. The asset is yours and can be transferred to whoever you want. Passive income refers to cash flow from real estate investment, intellectual property like music, books, inventions, patents etc. These are assets you work once to create and if well marketed continues to generate income long after you have stopped working on them. Income from paper assets such as money market instruments (fixed deposits, treasury bills etc), stocks, bonds etc are referred to as portfolio income. Again, once acquired, you don’t have to work for them to yield returns. Your money works for you while you do other things with your time. The rich focus on passive income while the poor and middle class focus on earned income. One income type is not better than the other. It depends on who you are and what you really want. What is important is making informed decisions. If you want to achieve financial independence, then you need to focus on passive income