The six ways money reaches you

Ask four questions about any income stream

Income is usually described by product: a fund, a note, a syndication, a platform, an app. That description tells you almost nothing about how the money is generated, which is the only thing that decides whether it continues.

Four questions do the work instead. Who physically hands you the cash? What are they paying it out of? What document, if any, obliges them to pay? And what would make the payments stop?

Answer those about a Treasury bill and about a self-storage facility and you get two completely different pictures, even in a period when the two happen to pay a similar amount. The similarity is a coincidence of price. The difference is structural.

In practice there are only six answers to the second question. The rest of this course takes one mechanism per lesson; this lesson is the map.

1. Interest from lending

The payer is a borrower: a bank holding your deposit, the US Treasury, a corporation, a homeowner, a small business. They pay out of their own revenue, their taxing power, or the cash flow of whatever they borrowed to buy.

The contract is explicit — a deposit agreement, a bond indenture, a promissory note — and it names an amount and a date. That makes interest the only mechanism here whose best case is fixed in advance. Hold the loan to maturity and, if everything goes right, you receive exactly what was promised and not a cent more.

It stops for two reasons. The borrower defaults, in which case collateral and seniority decide how much of your principal survives. Or the loan matures, the money comes back, and you have to lend it again at whatever rate exists on that day.

2. Distributions from ownership

The payer is a company or a fund you own a slice of. A dividend is paid out of earnings; a fund distribution is paid out of the income the fund collects, the gains it realises, and — often, and legitimately — a portion of your own capital handed back.

There is usually no contract at all. A common dividend is declared at a board's discretion, quarter by quarter. Preferred shares come closer to a promise, but even a cumulative preferred only guarantees that skipped payments accrue, not that they arrive.

Because it is a decision rather than an obligation, a distribution can be raised, cut, suspended, or paid in a year the company earned nothing. That cuts both ways: unlike interest, this stream can grow for decades, and unlike interest, nobody is in breach when it stops.

3. Rent and lease payments

The payer is a tenant, out of household income or business revenue. The contract is a lease, which sets the term, the escalation and — the part people skip — which side pays each expense.

Rent is gross. Out of it come property taxes, insurance, maintenance, management, capital repairs and any mortgage. What reaches you is the residual, which is why the rent figure in a listing is close to meaningless on its own.

It stops when a tenant leaves, stops paying, or fails as a business, and it pauses whenever the space sits empty between tenants. It also requires someone to collect it, chase it and fix the boiler — either you, or someone you pay out of the same rent.

4. Royalties and licensing

The payer is whoever uses a right you own: a streaming service, a publisher, a manufacturer, a franchisee, an oil and gas operator. They pay out of the revenue that the use generates, which is why a royalty scales with usage rather than with time.

The contract is a licence or a lease that names a rate, a base to apply it to, a term and — if you were careful — a right to audit the statements. You keep ownership of the underlying right throughout, which is what lets the same asset be licensed again in another territory or another medium.

It stops when usage decays, when the legal term runs out, when a physical resource depletes, or when the licence comes up for renegotiation and the other side has more leverage than you do.

5. Option premiums

The payer is an options buyer you will never meet, through an exchange and a clearing house. They pay out of their own capital, for a right they may never exercise, and the cash reaches your account at the moment of the trade.

The contract is standardised: a strike price, an expiry date, and an obligation on your side to deliver or to buy if the holder exercises. The premium is yours whatever happens next.

It stops the instant you stop selling contracts, because nothing is owed to you between trades. Each premium is a completed sale, not an entitlement — and it is compensation for an obligation that can cost more than every premium you have ever collected on the position.

6. Business profits

The payer is an operating company you own part of and do not run. It pays out of profit, which is the residual after employees, suppliers, landlords, lenders and tax have all been paid.

The contract is an operating agreement, a partnership agreement or a shareholders' agreement — the least standardised document in this course, and the one that decides everything about how and when you are paid.

It stops when the business has a bad year, when competition arrives, or simply when whoever runs it decides to reinvest the profit instead of distributing it. Being last in line is what gives this mechanism its range: it has the highest ceiling of the six and the least floor.

Why the mechanism, not the label, tells you what you hold

Two products quoting a similar headline percentage can sit at opposite ends of this map. A Treasury coupon is a contractual obligation of the federal government; a covered-call fund's distribution is the recycled proceeds of option sales plus, at times, your own capital. Both appear on a statement as cash. They are not the same promise.

The mechanism also tells you where to look for trouble. For lending, the question is credit and term. For distributions, it is discretion and coverage. For rent, it is vacancy and expenses. For royalties, it is usage and the definition of 'net'. For premium, it is assignment. For business profits, it is the operator.

Nothing in this course says which mechanism is preferable, because that depends on facts about you that this site does not know. What it can do is describe each one accurately enough that you can tell which one you are actually being offered.