3 Different Types of Income
Do you know how long does it take to make a Toyota car? Taking into consideration the assembly line, the paint job, manufacturing, etc. It only takes 17-18 hours. It’s all it takes to make a Toyota. And obviously you get what you pay for. Flipside, how long does it take to make a Rolls-Royce? It takes 6 months! Six long months to make a single Rolls-Royce. Do you think there’s a difference in perception of value there? Of course, there is!
So, moving on, when I am thinking about income, I am thinking about securing finances. Making sure that no matter what happens – pandemic, injustice, looting, rioting, chaos all over the world, no matter what happens, do you still have streams of income and have you stored cash?
What are we realizing throughout this crisis? That cash flow and cash is king. So many industries right now are being hit because of the pandemic. So many people are suffering. Do you know what this is telling you? This is telling you to buy the best insurance possible. Do you know what that is? Insurance for your cash flow! To make sure you got income coming in no matter what.
If you do so, you will have confidence even in the midst of a crisis. So, let’s look at the 3 different types of income according to the IRS. The first is called
Active income. People also call it earning income. This is basically the main way you earn a living – you clock in you clock out, you make a sale, make a commission, things like that.
The second type of income is called passive income. People usually have a huge misconception about passive income. They think that once they do something, they won’t ever have to touch it again in order to earn a passive income. But there is a chance that if you take your eyes off the ball, you might lose it. So, it is essential to be engaged with your passive income streams.
Thie third type of income is a portfolio income. You have a series of investments, they are providing you capital gains and dividends, and you’re living off of that.
If you want to build your life using this type of income, you have to figure out which type of income you are going to focus your time on to build and earn. So you have to figure out what is the most meaningful type of income to you.
If you want to be a cashflow millionaire, you should concentrate on the second and third types of income. Mitt Romney gets most of his income from his portfolio income. And this is the type that is taxed the least by the IRS. The reason for this is, the government wants to incentivize people to invest and help build big companies.
In order to take advantage of the passive and portfolio income, you have to build your cash flow first. To do that, you shouldn’t focus completely on linear income, which only makes you money at a fixed rate and for as long as you can do it. You should build your income in multiples like in compounding income, which is what compound interest allows you to do. If you can replicate this as an entrepreneur, you can get compound returns from your business.