Income and Expense Types

What You’ll Learn

To distinguish 8 cash-flow types: 3 income types + 3 expense types + savings + debt payoff.

Content

Cash flow has 8 categories. Three income types: active (salary), passive (rent, dividends), portfolio (capital gains). Three expense types: fixed, variable, discretionary.

Active income: paid for time. W-2 salary, 1099 freelance, sales commission. If you don’t work, it doesn’t come. US: federal 10-37% + state + FICA 7.65%. Stops when you’re sick.

Passive income: from an asset you set up once. Rental property, dividends (AAPL, KO, JNJ), interest (HYSA, bonds), royalties. Comes during vacation. Qualified dividends taxed 0/15/20%.

Portfolio income: when an asset appreciates. AAPL from $180 to $220 means $40 gain on sale. Long-term capital gains 0/15/20%, short-term at ordinary income rate.

Fixed expense: rent ($2,000), insurance (health + auto), Spotify + Netflix, internet, phone plan. Same every month with small variation.

Variable expense: groceries ($800-1,200), utilities (winter $300, summer $150), gas, childcare. Amount varies, necessary.

Discretionary: dining out, streaming over necessity, gifts, brand clothes, vacation. Opt-out doesn’t lose core lifestyle, just affects quality.

Savings and debt payoff are separate: savings is “paying your future self” (emergency fund, 401(k), Roth IRA, brokerage). Debt payoff is “paying your past self back” (above-minimum credit card payments). Savings = first line in budget.

Quiz

Question 1: What is active income?

• A) Passive rental income
• B) Money earned in exchange for time (W-2, freelance) (Correct)
• C) Capital appreciation
• D) Crypto staking

Question 2: Which is a passive-income example?

• A) W-2 salary
• B) AAPL dividend (Correct)
• C) Hourly contract work
• D) Sales commission

Question 3: Example of fixed expense?

• A) Groceries
• B) Rent or mortgage (Correct)
• C) Restaurant meals
• D) New iPhone

Question 4: Long-term capital gains tax rate?

• A) Ordinary income rate
• B) 0/15/20% (Correct)
• C) Flat 25%
• D) No tax

Action

This month, take 15 lines from your Chase or BofA statement. Tag each as N (need), W (want), or S (savings). Which category surprised you most?