The 7 Types of Income Millionaires Have
One of the conflicting viewpoints between my two dads was what a parent should say to a child. My poor dad always said to me, “Work hard at school so you can get good grades. When you get good grades, you will be able to get a good job. Then you become a good, hardworking man.”
While I was in high school, my rich dad would snicker at that idea of working hard.
He used to say, “Your dad is a good hardworking man, but he will never get rich if he continues to think that way. If you want to become rich, work hard for portfolio income and passive income. That is how you get your money working for you.”
The reality is that the less you are involved physically in your work, the greater your chances are of becoming very rich.
Again, I am not saying to not work hard. I am suggesting that today, we all need to learn how to make money smarter, not harder. I want you to learn how to do this, too. If you want to learn how to protect and even grow your wealth in the coming collapse, click here to find out the details of what’s coming, and take the 5 steps to do this.
Those who make the most money work the fewest hours in their day. They work the least because they work for passive income and portfolio income rather than ordinary earned income.
And as you know by now, all a true investor does is turn ordinary earned income into passive and portfolio income.
Active vs. Passive
There are two types of investors: active and passive.
Passive investors are those that blindly hand their money over and invest in the stock market via their 401(k)s, IRAs, and pensions. They are the ones who go broke when the stock market takes a dive.
Active investors are professional investors in the I quadrant of the CASHFLOW® Quadrant. They have high financial IQs, minimize their risk, and understand the tax advantages of investing.
Types of Income
A giant reason why the gap between rich, poor, and middle class grows wider is that there are three types of income:
One reason the gap grows wider is that schools teach students to work, save, and invest for earned income while the rich focus on passive income and portfolio income. That is the fundamental difference between the rich and the middle-class. The middle class loses so much money to taxes because their income is based on the services they provide rather than passive income from investments, and they spend their money on liabilities (like homes) instead of on assets that produce cash flow.
Ordinary Earned Income
Ordinary income is generally derived from a job or some form of labor and is the highest taxed of the three incomes. When you advise or encourage a person to “get a job,” that person starts thinking like an employee and working for ordinary income.
When a person says, “Go back to school and take your career to the next level,” that too means, eventually, working for ordinary income.
When a person advises someone to “save money,” that, too, makes a statement on taxes. The interest from savings is taxed as ordinary income.
When someone advises “save for retirement in a 401(k),” the long-term ramifications of this is that the income from a 401(k) is ordinary income.
Portfolio income is generally derived from paper assets such as stocks, bonds, and mutual funds. Portfolio income is by far the most popular form of investment income, simply because paper assets are easier to manage and maintain.
Portfolio Income is also called capital gains. A capital gain occurs when you buy low and sell high. For example, you buy a share of stock for $10 and you sell for $16. You have a capital gain of $6 per share. The $6 is portfolio income. The same is true when you buy real estate in a crash and then wait until it increases in value before selling it. Buying and selling real estate for a gain is the same thing: you buy low and sell high.
Passive income is generally derived from real estate but it can also be derived from royalties from patents or license agreements.
Passive Income is cash flowing from an asset. Your asset is producing money. In real estate, passive income is called rental income. For example, if I buy a rental property for $100,000 and my net monthly rental income is $1,000 a month, the $1,000 is passive income
Passive income from real estate is the lowest-taxed income, sometimes at 0%.
To become rich, you need to learn how to convert ordinary earned income into passive and portfolio income so your money can start working for you.
One of the many reasons I chose to work predominantly in the B and I quadrants, and earn portfolio and passive income, is because of tax advantages.
In 1943, the United States began taxing all working Americans via payroll deductions. People working for a paycheck paid the government before they got paid. Anyone who was an employee had little escape from the government. It also meant that instead of only the rich being taxed, which was the hope of the 16th Amendment, every employee and self-employed person got taxed — rich or poor.
Today the lowest wage-earners in America pay more in taxes, as a percentage of total income, than the rich and middle class.
Later, in 1986, the Tax Reform Act went after the highly paid professionals specifically targeting doctors, lawyers, architects, dentists, engineers, and other professionals. It made it difficult, if not impossible, for them to shelter their income the way that the rich can do in the B and I quadrants.
For most people working on the left side of the quadrant (employees and self-employed), there are few legal tax breaks available. Yet legal tax breaks abound on the right side of the quadrant.
By working to generate income in the B and I quadrants, I could acquire money faster and keep that money working for me longer without losing large chunks of it to the government in the form of taxes.
After the 1986 Tax Reform Act, the rich continue to earn more, work less, pay less in taxes, and enjoy greater asset protection.
You can do the same.
Editor, Rich Dad Poor Dad Daily