One of many tips for getting rich and creating wealth is to understand the different methods income can be generated. It’s often said that the lower and middle-class work for money whilst the rich have money work for them. The key to wealth creation lies in this simple statement. Imagine, instead of you doing work for money that you instead made every dollar work for you 40hrs a week. Better still, imagine every single dollar working for you 24/7 i.e. 168hrs/week. Figuring out the very best methods for you to make money be right for you is an important step on the way to wealth creation.
In the united states, the inner Revenue Service (IRS) government agency accountable for tax collection and enforcement, passive income into three broad types: active (earned) income, passive income, and portfolio income. Money you make (other than maybe winning the lottery or receiving an inheritance) will belong to one of these brilliant income categories. In order to learn how to become rich and produce wealth it’s vital that you learn how to generate multiple streams of residual income.
Residual income is income generated from a trade or business, which does not require the earner to participate. It is usually investment income (i.e. income that is not obtained through working) but not exclusively. The central tenet of this sort of income is that it should expect to carry on whether you continue working or otherwise. While you near retirement you might be most definitely wanting to replace earned income with passive, unearned income. The trick to wealth creation earlier on in your life is residual income; positive cash-flow generated by assets that you simply control or own.
A primary reason people find it difficult to create the leap from earned income to more passive types of income would be that the entire education system is actually virtually created to teach us to do employment and hence rely largely on earned income. This works well with governments as this type of income generates large volumes of tax and can not meet your needs if you’re focus is on how to become rich and wealth building. However, to be rich and make wealth you may be necessary to cross the chasm from relying on earned income only.
Property & Business – Causes of Residual Income. The passive type of income is not really determined by your time. It really is dependent on the asset as well as the management of that asset. Passive income requires leveraging of other peoples money and time. As an example, you might purchase a rental property for $100,000 employing a 30% down-payment and borrow 70% from your bank. Assuming this property generates a 6% Net Yield (Gross Yield minus all Operational Costs including insurance, maintenance, property taxes, management fees etc) you would produce a net rental yield of $6,000/annum or $500/month. Now, subtract the cost of the mortgage repayments of say $300/month out of this so we get to a net rental income of $200 using this. This can be $200 passive income you didn’t need to trade your time and effort for.
Business can be quite a supply of passive income. Many entrepreneurs start out in business with the idea of starting an organization to be able to sell their stake for a few millions in say five years time. This dream will only turn into a reality in the event you, the entrepreneur, will make yourself replaceable so that the business’s future income generation will not be influenced by you. If you can do this than in a way you have developed a source of passive income. To get a business, to become true supply of passive income it will require the appropriate systems as well as the right kind of people (other than you) operating those systems.
Finally, since passive income generating assets are often actively controlled by you the homeowner (e.g. a rental property or a business), there is a say within the everyday operations in the asset which can positively impact the level of income generated.
Passive Income – A Misnomer? In some manner, passive income is really a misnomer as there is nothing truly passive about being responsible for a small group of assets generating income. Whether it’s a property portfolio or even a business you possess and control, it is rarely if truly passive. It should take one to be involved at some level in the control over the asset. However, it’s passive in the sense it fails to require your day-to-day direct involvement (or at a minimum it shouldn’t anyway!)
To be wealthy, consider building leveraged/passive income by growing the dimensions and amount of your network as opposed to simply growing your skills/expertise. So-called smart folks may spend their time collecting diplomas and certificates but wealthy folk spend their time collecting business card printing and building relationships!
Recurring Income = A Form of Passive Income.Recurring Income is a type of passive income. The terms Passive Income and Recurring Income tend to be used interchangeably; however, there is a subtle yet important difference between the two. It is income which is generated every now and then from work done once i.e. recurring payments that you get long after the initial product/sale is created. Residual income is normally in specific amounts and paid at regular intervals. Some example of recurring income include:-
– Royalties/earnings through the publishing of any book.
– Renewal commissions on financial products paid to a financial advisor.
– Rentals from a property letting.
– Revenue generated in multi level marketing networks.
Usage of Other People’s Resources along with other People’s Money
Usage of Other People’s Resources and Other People’s Money are key ingredient needed to generate passive income. Other People’s Money buys you time (a key limiting factor of earned income in wealth creation). In a sense, usage of other people’s resources gives you back your time and effort. In terms of raising capital, businesses that generate residual income usually attracts the greatest amount of Other People’s Money. This is because it is generally easy to closely approximate the return (or at least the chance) you eammng expect from passive investments therefore banks etc., will often fund passive investment opportunities. A good business plan backed by strong management will most likely attract angel investors or venture capital money. And property can be acquired having a small down payment (20% or less sometimes) with a lot of the money borrowed from the bank typically.
Tax Advantages of Passive Income – Residual income investments often allow for the most favorable tax treatment if structured correctly. As an example, corporations can use their profits to purchase other passive investments (real estate, for instance), and avail of tax deductions in the process. And property can be “traded” for larger property, with taxes deferred indefinitely. The tax paid on residual income can vary based on the individuals personal tax bracket and corporate structures utilized. However, for the purpose of illustration we could claim that typically 20% effective tax on passive investments will be a reasonable assumption.
For good reason, home based business is usually regarded as being the holy grail of investing, and also the key to long-term wealth creation and wealth protection. The key benefit of residual income is it is recurring income, typically generated month after month without a lot of effort on your part. Building wealth and becoming rich shouldn’t be about extracting every last bit of your personal energy, your own resources and your own money because there is always a limit towards the extent this can be achieved. Tapping to the effective generation and utilize of passive income is a critical step on the road to wealth creation. Begin this part of you wealth creation journey as soon as is humanly possible i.e. now!