The money you make falls into one of two basic categories: earned income and passive income.

Earned income is the income you receive by working for a company or someone who pays you, or from a business that you own and run. Earned income includes your hourly wages, salaries, tips, commissions, and bonuses. This is the most common way to make money. Of course, if you stop working, you stop earning. However, if you save and invest your earned income wisely, you can turn it into passive income.

Passive income is generated from assets you buy or create, such as financial investments, rental real estate, or something you have created, such as a book or a song. If you buy a house and rent it for more than your mortgage and other expenses, the profit is passive income. If you write and publish a book or a song that pays royalties, that is intellectual property that pays passive income. The benefit of passive income is that you get paid with little or no additional work on your part. That makes it possible to retire and still receive money to pay your everyday living expenses.

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Although you must have income to meet your financial needs, it doesn’t give you lasting wealth unless you save or invest some amount of it on a regular basis. Even those with high incomes can live paycheck to paycheck and end up with no true wealth. Likewise, those with modest incomes can save small amounts of money over a long period of time and accumulate a nest egg for a healthy financial future.