There are different types of income. The knowledge of these types of income gives you the option to choose how you want to earn income. Lack of knowledge in this area has made many to focus only on what they know – working for money.
If you want to achieve financial independence and freedom, you need to know the different types of income, their characteristics and the ones that works out best for you. There are three basic types of income namely:
1) Earned Income
2) Portfolio Income
3) Passive Income
This is the most popular form of income, working for money. Rich Dad in ‘Rich Dad, Poor Dad’ by Robert Kiyosaki calls this bad income because of the disadvantages that go with it. You are taxed before you get to see your salary, the tax rate is often higher than other income types. You have no control over your income. You cannot double your income even if you belong to a powerful union. You depend on your employer to give you a raise. Your time is not yours. You are essentially trading in your life for your salary. This income type has little or no leverage. You cannot hire someone to help you with your job. You cannot transfer your job to your son. Your salary stops when you stop working. This income type gives minimum control.
This income comes from paper assets like stocks, bonds, money market instruments, businesses etc. Your return on investment in portfolio income depends on your level of financial education. An experienced investor can use stock options to protect his position while the average investor goes in naked (fully exposed to market fluctuations). The taxes here are lower. In a business, your profit is taxed rather than turnover. You spend first and get taxed on what is left, if any. Hence the business owner has control over his taxes unlike the employee. There is more control in portfolio income depending on the investor. If you own a stock of a company, you can control your entry and exit price, if you know what you are doing. You have more control if you own enough shares to sit on the board of the company. If you own the company (entrepreneur), you have full control.
This is income from real estate, intellectual property (books, music, patents etc) etc. You do the work once and get paid virtually forever (you, your descendants etc). You make money while you sleep or away on vacation. Here, you have full control. You can decide to double your income by doubling your assets or stepping up your marketing. You control your time, income, taxes etc. Rich Dad calls passive income good income.
As an employee, you are not constrained to earned income only. You can enjoy portfolio income by investing in an asset class you are familiar with, or starting a part time business, and passive income by investing in real estate, writing books, music, scripts, inventions or whatever you are good at. If you want to achieve financial freedom, you need to diversify your income sources. Depending only on earned income is a symptom of financial illiteracy.
– Usiere Uko is editor of www.financialfreedominspiration.com and author of Practical Steps to Financial Freedom and Independence – www.amazon.com/Practical-Steps-Financial-Freedom-Independence/dp/147006832X .