3 Ways To Work Less (Or Not at all) and Earn More
“If you want to get rich,” said rich dad, “don’t ask for a raise. Instead of asking for a raise, begin to ask how you can serve more people. In fact, if you are serious about becoming rich, you don’t really want a raise. If you get a raise, you are working for the wrong kind of money.”
I shared how I retired early by increasing my debt rather than trying to get out of debt, which is what most people try to do. The logic behind that thinking is that there is good debt and bad debt, and most people are loaded down with bad debt.
The same is true with income. Most people are not aware that there is good income and bad income, and most people do not become rich because they work hard for bad income. When you ask for a raise, you ask for an increase in bad income. If you want to retire young and retire rich, you need to work hard for the right kind of income.
There are three different types of income:
1. Ordinary income
Ordinary earned income is you working for money. This income comes in the form of a paycheck. When you ask for a raise, bonus, overtime, commissions, or tips, you’re asking for more of this type of income.
2. Portfolio income
Portfolio income is generally income from paper assets such as stocks, bonds, and mutual funds. A vast majority of all retirement accounts are based on future portfolio income.
3. Passive income
Passive income is generally income from real estate. It can also be royalty income from patents or for use of your intellectual property such as songs, books, or other objects of intellectual value.
Why Search for A Higher Paying Job
In rich dad’s mind, the worst kind of income to work hard for was ordinary income. To him, it was the worst income for four main reasons:
1. It is the highest taxed income and it is the income with the fewest controls over how much you pay in taxes and when you pay your taxes.
2. You personally have to work for it, and it takes up your valuable time.
3. There is very little leverage in ordinary income. The primary way most people increase their earned income is by working harder.
4. There is often no residual value for your work. In other words, you work, get paid, and then have to work again to be paid again. To rich dad, there was very little leverage in working for ordinary income.
Growing up, I always found it interesting that rich dad did not like ordinary income. He often said, “The worst advice you can give your child is to go to school in order to get a high-paying job.” The reason he said that was not because he was against school. He was against teaching your children to spend their lives working for ordinary income. Most people I knew dreamed of high-paying jobs with lots of ordinary income. As I said, the difference in realities was more than just different. It was exactly the opposite. Rich dad said, “Teaching people to spend their lives working for ordinary income is like teaching someone to be a highly paid slave for life.”
Why Rich Dad Liked Passive Income
Although he did receive all three types of income, if given the choice among the three, he would take passive income all the time. Why? Because it was the income he had to work the least, it is often the least taxed, and it consistently earned him some of the highest returns over a long period of time. In other words, he worked hard for passive income because, in the long run, he worked less and less, serve more and more people, and earned more and more the older he got.
In my quest to retire young and retire rich, I had to know which type of money to work hard for. Kim and I were able to retire early because our plan had us working hard for passive income and not for ordinary income, which is what most people do. Another difference is that we planned on retiring with more passive income and not portfolio income, which is what most people plan to retire on. While most people do retire on portfolio income, it is not always the best income because it is the second highest taxed of the three incomes, and taxes are your largest single lifetime expense
My rich dad had all three types of income. The reason he had all three was because each type of income had different advantages and disadvantages. My poor dad worked hard for only one type of income. That difference between the two men made a big difference when measured over their working lifetimes.
My two dads did not work hard for the same kind of money. My poor dad said repeatedly, “Go to school so you can get a high-paying job.” My rich dad said, “It is not how much you make that counts, but how much money you keep.” He went on to say, “Ordinary income is the income that you work the hardest for and you are allowed to keep the least of.”
Rich dad often called ordinary income, the income you receive from a paycheck, “50-percent money.” The reason he called it “50-percent money” was because, no matter how much money you earn, the government always takes at least 50 percent of it or more in one way or another. If you make $50,000 a year, then at least $25,000 may go to the government, most of it before you even get your hands on it (through withholding). Even after you receive that remaining $25,000, the taxing continues on. As most people know, you are taxed when you earn, spend, save, invest, and when you die. In fact your taxes at death can be very high if you are not properly prepared for the event. As rich dad often said, “If you do not have a plan for your money after you die, then the government does.”
From rich dad’s point of view, it was not very smart to work hard and have the government take at least 50 percent of what you work hard for. (A few years back, the tax rate was even higher than 50 percent. While the rate has come down over the last few years, many of the tax loopholes have been taken away in order to compensate for the lowering of tax rates. The fact is, when rich dad was in his prime earning years, he often called ordinary income “80-percent money” because that is how much the government took from highly paid people.)
My poor dad did not know that there was a difference in the different types of income. And since he did not know there was a difference, he worked very hard for “50-percent money” and then bought a bigger house for the tax breaks that he never really got. Rather than finding out more about the different types of income, my dad would go back to school so he could receive a promotion and a pay raise. In other words, he worked hard, studied hard, earned more, and paid more and more in taxes because he worked for “50-percent money.”
Rich dad had a difficult time understanding people who spent their lives in search of a higher paying job or a pay raise. He often said, “When you get a raise, so does the government.” To him, spending your life working hard for “50-percent money” was not the financially intelligent thing to do.
Most people today are attempting to retire utilizing what my rich dad called “20-percent money,” which is money from capital gains or appreciation of stocks and sometimes real estate. When you hear politicians say, “My opponent is giving a tax break to the rich,” they are often referring to some sort of tax break on investment income.
Many people are financially smarter and not working so hard for ordinary income. Many people are asking for stock options that can be “20-percent money” if the company succeeds. (A certain portion is treated as ordinary income, but the increase in value afterward may be “20-percent money.”) A stock option can also be worth nothing if the business does not improve its perceived value to the market. The point is that people are catching on to the tax advantages and the different levels of leverage of the different types of income. The growing gap between the haves and have-nots is because most people are not aware that there are different types of income, and they work hard for the wrong kind of income.
One of the reasons Kim and I retired early was because we utilized tax-deferred money and many times what my rich dad called “0-percent money.” Tax-deferred money is money from capital gains that is not immediately taxed and is deferred for as long as we choose to defer paying those taxes.
In America, one of the advantages of investing in real estate over paper assets is this legal loophole in the tax code. The reason the government allows this loophole is because it wants investors to keep their money invested in real estate to provide a supply of housing for people who choose not to buy or cannot afford their own home. The tax break keeps investors such as Kim and me to provide an abundant supply of rental homes and thus keeps down the cost of housing. These tax incentives also keep the real estate industry vibrant and help the nation’s economy stay strong, since real estate makes up a large sector of the U.S. economy. If the real estate industry hurts, so does the country.