WEALTH EDUCATION (3): TYPES OF INCOME
Some
types of income grow wealth by multiplication; others grow money by addition. In
this post, a continuation of our series on Wealth Education, we’ll see what types
of income the rich people engage to grow their wealth exponentially. This knowledge
will empower you to know how to USE YOUR PRESENT INCOME to create assets that will
constantly multiply your future wealth.
Let us start by defining income. INCOME is
the amount of money received over a period of time whether as payment for work,
goods, or services, or as a profit on capital.
There are many types
of income, but the main ones which are very useful in our discussion include the following:
(i) Earned (Active) Income (ii)
Passive Income (iii) Residual Income
(iv) Portfolio Income
(I) EARNED (ACTIVE) INCOME:
This is the money earned from working
that requires your time. You have to work actively in order to be paid.
Salaries of civil and public servants, income, wages and allowances of company
staff, profits from sales made by shop owners, and money earned by contractors
are all earned or active income. If they don’t work for it they can’t get paid.
No work no pay. In our Cashflow Quadrant, people on the left side (Employees
and Self-employed persons) are those who receive Earned Income. Most people in the
world live in Earned Income.
(2) PASSIVE (INACTIVE) INCOME: This is the income derived from business investments in
which individuals are not actively involved. It could also be said to be
money generated from the ASSETS we own in which we are not actively working. If you have
property (house or stores) and you receive rent
on it, that is said to be passive income. Royalties
(proceeds from published works) and patents
(proceeds from inventions), are also grouped under passive income.
So in passive income, you create value (service or product) once after which you continue to get paid indefinitely. You build the house once but collect rent on it all the rest of your life. If you are an author, you write the book once (apart from updating it from time to time) and receive royalty all the rest of your life. The returns on audio and video CDs are also grouped under passive income.
(3)
RESIDUAL INCOME: The PassiveIncomeGuide.com explains residual
income as “Recurring payments that you
receive long after the initial sale is made, usually in specific amounts and at
regular intervals.” Network marketing also yields this kind of income. You build
your team (downlines) and earn a commission off your first line and a
percentage of what your team does. The diagram below summarizes what you stand to
gain in passive and residual incomes.
(4) PORTFOLIO
INCOME: This is an income one gets by selling an investment at a higher price
than he paid for it. In general, paper
assets such as stocks or shares, bonds, mutual funds, and so on, generate this
type of income. Some people call it
“capital gains,” because that’s how
the money is taxed by the federal government.
Passive
and residual incomes are considered as the key to building wealth.
Once you have an investment that generates recurring income, you don’t have to
do much to maintain it (so time is not a limitation).
Truth is that the rich people in
the world build their wealth through passive, residual and portfolio incomes. Even
if they started from the Earned Income side, they kept saving little by little and
investing it to move from the left side of the Quadrant to the right side. This
is what you too can do, if you are still on the left. In earned income you work
for money, but in passive and residual incomes, your money works for you.
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