Income is the lifeblood of personal finance. It's the starting point for all financial planning, whether you're budgeting, saving, investing, or even spending. Understanding the various sources and types of income can empower you to make informed decisions that lead to financial stability and growth. In Kenya, where the financial landscape is rapidly evolving, grasping the intricacies of income is more crucial than ever. In this section, we'll delve into the different types of income, the importance of diversifying your income streams, tax implications, and how to maximize your earning potential.
TYPES OF INCOME
Understanding the types of income is the first step in financial planning
There are primarily three types of income: earned income, passive income, and portfolio income.
Earned Income: This is the money you make from your job, freelance work, or business. In Kenya, this could be a salary from working in a company, income from a small business like a 'kiosk' or 'mama mboga,' or even money made from agricultural activities. Earned income is subject to income tax and other statutory deductions.
Passive Income: This is income that requires little to no effort to maintain. In Kenya, this could be money earned from renting out property, such as residential or commercial real estate. It could also include royalties from creative works or patents. Passive income is generally taxed differently and may not require the same level of active involvement as earned income.
Portfolio Income: This is income generated from investments like stocks, bonds, or mutual funds. In Kenya, you might earn this type of income through the Nairobi Securities Exchange (NSE) or other investment platforms. Portfolio income is subject to capital gains tax and is not considered earned income, as it comes from managing investments rather than working a job.
Not all income streams are equally stable. A salary from a reputable company might be more reliable than income from a seasonal business. Evaluating the stability of your income sources can help you prepare for uncertainties, such as economic downturns or unexpected expenses.
Regularly review your income streams to identify trends, risks, and opportunities. Are your investments yielding the expected returns? are your earnings keeping up with inflation? Analyzing these factors can help you make informed decisions, like switching jobs or reallocating investments.
Interesting Fact: Did you know that in Kenya, income from agricultural activities, a significant contributor to the economy, is often considered a form of earned income?
DIVERSIFYING INCOME STREAMS
Putting all your eggs in one basket is never a good idea, especially when it comes to income. Diversification is key to financial stability. Combining multiple income streams—earned, passive, and portfolio income—can provide a financial safety net
-
Depending Solely on One Income Source is Risky: Relying on just your salary or one business can be precarious, especially with economic uncertainties like inflation and unemployment.
-
Financial Safety Net Through Diversification: Spreading your income sources can act as a financial cushion. For instance, if one income stream dries up, you have others to fall back on.
-
Supplementing Earned Income: In addition to your main job or business, consider side hustles like running a boda boda, selling goods at a kiosk, or freelance opportunities in your field. Investments in the Nairobi Securities Exchange or real estate can also add to your income streams.