There are many ways to generate money and income in the modern economy. Every now and then you hear about all the different sources of income someone has. What you don’t hear is what each one means and whether it truly benefits you to have them. There are generally seven major sources, and each one has a different investment objective behind it, whether that is with time or money.
1. Earned Income
Earned income is usually the first type of income someone receives. When you get a job and get paid a salary, this would be considered earned income. This could also include hourly work or tips. The main point is that an employer pays you for your time while you work for the company.
A large percentage of Americans rely on their earned income for their livelihood. It is the working people who earn their income through a reliable and dependable job, and that helps carry on the economy. They may have a few other sources of income but primarily those who don’t own businesses focus on maximizing the income they can earn.
2. Interest Income
The second source of income is interest income. A savings account at a bank or certain investments can pay interest to the investors. Banks want to hold your savings, so they will offer to pay you interest in exchange for banking with them. Up until recently, interest income has not been too popular in terms of building wealth. Most interest income is tied to the more general concept of interest rates.
The interest that your savings account generates at the bank, or in a high yield savings account, is usually impacted by the larger interest rates in the economy. Within the last few years, interest income has become more popular with the general rise in interest rates. Higher rates have given people access to better-paying interest income through some investments like bonds or savings accounts.
3. Dividend Income
The third type of income is dividend income. This income typically comes from investing in public companies that issue a dividend periodically. When companies generate a profit, some decide to pay out those profits to the shareholders that own the company. These payouts are called “dividends” and help give money back to the investors.
There is a philosophy in the investing world to classify companies based on the level of dividends they pay out. Some believe companies that do not pay out any dividends (and spend all profits on reinvesting in the company) are considered more growth-oriented than other companies that pay out larger dividends. Therefore, the companies that pay dividends could be considered more conservative by focusing on providing you a steady stream of income for investing in their company.
4. Capital Gains Income
Capital Gains income is how you can generate income from those more growth-oriented investments. Instead of getting a periodic interest payment or dividend, capital gains income is solely focused on selling the investment for higher than the purchase price. This could be for a stock, a real estate investment, or other assets.
Capital Gains can also be attractive due to the favorable tax treatment. As of 2025, capital gains rates are 0%, 15%, and 20%. Importantly, these are long-term capital gains rates, which means investments must be held for at least 1 year. Depending on the family, those in higher income tax brackets would prefer to pay 15% in taxes than 30%+ on ordinary income tax rates. The larger the income, the more capital gains are incentivized.
5. Rental Income
The next type of income is Rental Income. People who purchase residential or commercial properties do so to generate rental income. Certain aspects can be similar to a dividend, where you receive rent payments in exchange for owning the property. However rental income is usually specific to owning apartments, houses, office buildings, etc.
Rental income can also be viewed as a passive income. While you could argue that many of these income types are passive (as in you are not actively involved in the company operations), the IRS recognizes some rental income as passive income. This allows for different tax rules and additional deductions that may not otherwise be attainable with other income streams.
6. Business Income
Business income is the earnings you generate after providing a good or service to a customer. Again, similar to a dividend, but generally this income is geared towards your outright ownership and management of your business. After adjusting for all the expenses related to running the business, profits can be one of the best ways to increase personal wealth.
This is when the question of how much business income/profits to distribute becomes important. Some would argue to reinvest all profits into the business to grow it as fast as possible, similar to the Capital Gains approach. Others may argue for “income diversification” and claim you need to take money out of the business and invest in one or more of these other income streams. The real answer comes down to the specific situation for the business and the owner.
7. Royalty Income
Lastly, royalty income is probably the least utilized type of income. This income is generated by selling intellectual property, or rights to certain created products. Think of patents and copyrights. It is possible to restrict people from repeating your designs or creations, and then you can sell the rights to others in exchange for an ongoing royalty fee.
Think of a song or a TV show. After the initial creation process is over, the rights to the production can be the paramount way to generate income. A song could be popular for years or decades and thereby still generate royalty income. However, few people can create that level of popularity and impact, which could sway the costs and benefits of attempting to create something worthy of royalties in the first place.
What Income Is Important?
At the end of the day, it is not necessary or required to have all seven income types. Many people could have three or four just from the natural course of their financial lives. There are major camps that believe for or against each income source, so it is important to understand which income fits your lifestyle. Diversifying your income can provide benefits if one source becomes unavailable (like losing your job), but diversifying to all seven could create a lack of focus and therefore not efficiently build wealth. Ultimately, what is important is that all your investments are focused on your needs, goals, and objectives.
TC Falkner 