While passive income will have you exerting energy within 25% to 70% of the energy you exert for earned income, portfolio income should not account for more than about 20% of the energy you exert for earned income. The deal is even sweeter when you realize that portfolio could lead to returns equal to or greater than passive income. Unlike earned income, and to a lesser extent passive income, portfolio income will require another income source at least during the initial stages. A person depending on earned income may start earning that income without any prior accumulation of cash. The same is sometimes true for passive income earners. An individual earning passive income from tutoring can do so without having any prior accumulation of cash. This is not usually the case with portfolio income. Portfolio income comes from investments, and investments require a prior accumulation of cash. This prior cash requirement may be avoided by involvement in what is called Margin trading. Margin trading is simple the borrowing of money from your investment provider to trade in stocks. It is highly unlikely that an investor will be involved in margin trading during the early stages of her investment history. So clearly, the existence of earned and or passive income is usually necessary for someone to earn portfolio income. Of the three income categories, portfolio income is usually the most risky. An individual may choose the risk level that is appropriate for his or her comfort. The risk level will however determine the amount of portfolio income earned. The higher the investment risk, the greater the possibility of earning higher levels of portfolio income, and the lower the risk the lower the possibility. Risk-averse investors will more than likely gravitate towards the Money Market, where low risk/low returns investments abounds. Investments in the Money Market are usually closed end, with a stated time period and a stated return. An investment in certificates of deposit is a good example of a money market investment. At the time of the investment, the individual investor will be informed of the interest rate (ex. 5% per year) applicable to the investment and the life (6 months) of the investment. The Capital Market is the where the investor will shop for stocks and bonds. Investment is stock is a very risky endeavor, but one that is becoming more and more popular. To mitigate your risk, you should try to learn as much about your investment as possible. This includes the financial condition of the companies, the industries they trade in, their management strengths and so on. Essentially, the best approach to portfolio income is to be organized. Organize your investment according to your goals and according to your income available for investment. Invest according to your goals, your income and your risk tolerance. Properly organized your goal should be medium to long-term in scope and your capital market investment should be well diversified in the form of a portfolio (hence the term, portfolio income). A portfolio is a grouping of stocks and bonds (mutual fund may be included) combined in a “scientific” manner to reduce risk. The “science” behind portfolio management is diversification, a technique used to reduce risk in a portfolio. In your quest for portfolio income, you should ensure that your other incomes are not at significant risk, at least not the major portion. You may choose an aggressively risky portfolio, a conservative portfolio or a portfolio somewhere in the middle. A well-organized investor will have very little need to choose an aggressively risky investment. Portfolio income is usually sourced in a fairly risky/very risky manner, but as a result can increase overtime to account for a high portion of the individual’s overall income. The risk associated with money and capital markets investments can be minimized through prudent research and disciplined decision-making practices. The first thing to do is to respect the markets, and to understand the relationship between risk and returns. As you may have concluded, the different categories of income (Earned, Passive and Portfolio) carry their own levels of risk. The least risky of the three is earned income, and the most risky is portfolio income. Be smart and start planning how you earn your income today. It is never too late to start planning, but delays may cost you. For the average individual starting his/her career, the majority of income will be Earned Income, a small amount will be Passive Income and an even smaller amount will be Portfolio Income (generally speaking). The following is an illustration of how the average person’s income may be sourced during her/his professional life. The aim is to keep increasing the absolute level of earned income as long as you’re employed, and to strive to increase the percentage of passive and portfolio income over time. Income source during the first ten years of employment Earned income > 70% Passive P/folio Income source during the second ten years of employment Earned income > 55% Passive P/folio Income source during future years of employment Earned income about 45% Passive P/folio It is probably a good idea to start scouting around for passive income the first chance you get. If you’re leaving college, think of something that you do that could generate an income. For a seasoned professional, you may want to look at what you do “at work” and how you can use your knowledge to earn passive income. You may be a Carpenter employed to a Contracting firm. Instead of offering your service as a contractor (which may create a conflict of interest), you may consider doing repair work on the weekends. Year after year as your earned income and passive income increases (hopefully!), you will be able to move more and more money from risk free investments (probably money market investments) to more risky investments (probably capital market investments). This will eventually lead to greater portfolio income as a percentage of your total income, and that is certainly not a bad thing! Go to Personal Finance - part 1