Some types of income grow wealth by multiplication; others grow money by addition. In this post, a continuation of our series on Wealth Education, we’ll see what types of income the rich people engage to grow their wealth exponentially. This knowledge will empower you to know how to USE YOUR PRESENT INCOME to create assets that will constantly multiply your future wealth.

Let us start by defining income. INCOME is the amount of money received over a period of time whether as payment for work, goods, or services, or as a profit on capital.

There are many types of income, but the main ones which are very useful in our discussion include the following:

(i) Earned  (Active) Income  (ii) Passive Income (iii) Residual Income
(iv) Portfolio Income

(I) EARNED (ACTIVE) INCOME: This is the money earned from working that requires your time. You have to work actively in order to be paid. Salaries of civil and public servants, income, wages and allowances of company staff, profits from sales made by shop owners, and money earned by contractors are all earned or active income. If they don’t work for it they can’t get paid. No work no pay. In our Cashflow Quadrant, people on the left side (Employees and Self-employed persons) are those who receive Earned Income. Most people in the world live in Earned Income.

(2) PASSIVE (INACTIVE) INCOME: This is the income derived from business investments in which individuals are not actively involved. It could also be said to be money generated from the ASSETS we own in which we are not actively working. If you have property (house or stores) and you receive rent on it, that is said to be passive income. Royalties (proceeds from published works) and patents (proceeds from inventions), are also grouped under passive income.

So in passive income, you create value (service or product) once after which you continue to get paid indefinitelyYou build the house once but collect rent on it all the rest of your life. If you are an author, you write the book once (apart from updating it from time to time) and receive royalty all the rest of your life. The returns on audio and video CDs are also grouped under passive income.

(3) RESIDUAL INCOME: The PassiveIncomeGuide.com explains residual income as “Recurring payments that you receive long after the initial sale is made, usually in specific amounts and at regular intervals.” Network marketing also yields this kind of income. You build your team (downlines) and earn a commission off your first line and a percentage of what your team does. The diagram below summarizes what you stand to gain in passive and residual incomes.