One of many secrets of getting rich and creating wealth is to understand the different ways in which financial security can be generated. It’s often stated 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 employed by money that you instead made every dollar work to suit your needs 40hrs every week. Better still, imagine each dollar working for you 24/7 i.e. 168hrs/week. Determining the best ways you can make money work to suit your needs is an important step on the way to wealth creation.
In the US, the inner Revenue Service (IRS) government agency in charge of tax collection and enforcement, categorizes income into three broad types: active (earned) income, passive income, and portfolio income. Any money you make (apart from maybe winning the lottery or receiving an inheritance) will fall into one of these income categories. In order to understand how to become rich and create wealth it’s vital that you know how to generate multiple streams of residual income.
Crossing the Chasm – Passive income is income generated from a trade or business, which does not require the earner to participate in. It is usually investment income (i.e. income that is not obtained through working) however, not exclusively. The central tenet of this sort of income is it can anticipate to continue whether you continue working or not. When you near retirement you happen to be most definitely wanting to replace earned income with passive, unearned income. The trick to wealth creation earlier on in life is lending club; positive cash-flow generated by assets that you simply control or own.
A primary reason people find it difficult to make the leap from earned income to more passive causes of income would be that the entire education method is actually virtually created to teach us to perform work so therefore rely largely on earned income. This works for governments as this kind of income generates large volumes of tax and can not work for you personally if you’re focus is concerning how to become rich and wealth building. However, to be rich and produce wealth you will end up required to cross the chasm from relying on earned income only.
Real Estate Property & Business – Causes of Passive Income – The passive form of income is not really influenced by your time and effort. It is dependent on the asset as well as the handling of that asset. Passive income requires leveraging of other peoples time and expense. For instance, you can purchase a rental property for $100,000 using a 30% down-payment and borrow 70% from the 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 generate a net rental yield of $6,000/annum or $500/month. Now, subtract the cost of the mortgage repayments of say $300/month from this and we get to a net rental income of $200 using this. This can be $200 residual income you didn’t need to trade your time for.
Business can be a supply of passive income. Many entrepreneurs start off running a business with the thought of starting a company in order 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, can make yourself replaceable so that the business’s future income generation is not really dependent on you. If you can do this than in a way you might have created a source of passive income. For any business, to turn into a true supply of passive income it requires the right kind of systems as well as the right kind of people (apart from you) operating those systems.
Finally, since residual income generating assets are usually actively controlled by you the property owner (e.g. a rental property or even a business), you do have a say inside the day-to-day operations from the asset which can positively impact the degree of income generated.
Passive Income – A Misnomer? In some way, residual income is actually a misnomer while there is nothing truly passive about being in charge of a small group of assets generating income. Whether it’s a property portfolio or a business you possess and control, it really is rarely if ever truly passive. It will require one to be involved at some level inside the control over the asset. However, it’s passive within the sense which it will not require your day-to-day direct involvement (or at a minimum it shouldn’t anyway!)
To get wealthy, consider building leveraged/passive income by growing the dimensions and level of your network instead of simply growing your abilities/expertise. So-called smart folks may spend their time collecting diplomas and certificates but wealthy folk spend their time collecting business cards and building relationships!
Recurring Income = A Form of Residual Income
Residual Income is a type of residual income. The terms Residual Income and Recurring Income are frequently used interchangeably; however, there exists a subtle yet important distinction between both. It is actually income which is generated from time to time from work done once i.e. recurring payments that you get long following the initial product/sale is made. Recurring income is normally in specific amounts and paid at regular intervals. Some illustration of residual income include:-
– Royalties/earnings from your publishing of the book.
– Renewal commissions on financial products paid to some financial advisor.
– Rentals from the property letting.
– Revenue generated in multi level marketing networks.
Use of Other People’s Resources as well as other People’s Money. Usage of Other People’s Resources as well as other People’s Money are key ingredient necessary to generate passive income. Other People’s Money buys you time (a key limiting factor of earned income in wealth creation). In a sense, utilization of other people’s resources provides you with back your time and effort. With regards to raising capital, companies that generate passive income usually attracts the largest amount of Other People’s Money. This is because it is actually generally easy to closely approximate the return (or at a minimum the risk) you can expect from passive investments and so banks etc., will usually fund passive investment opportunities. A great strategic business plan backed by strong management will usually attract angel investors or venture capital money. And property can often be acquired using a small down payment (20% or less sometimes) with most of the money borrowed from a bank typically.
Tax Benefits of Residual Income – Residual income investments often allow for favorable tax treatment if structured correctly. As an example, corporations can use their profits to purchase other passive investments (real estate property, as an example), and avail of tax deductions along the way. And real estate can be “traded” for larger property, with taxes deferred indefinitely. The tax paid on residual income can vary based on the individual’s personal tax bracket and corporate structures utilized. However, for your xwmpuf of illustration we might say that around 20% effective tax on passive investments will be a reasonable assumption.
In conclusion: Once and for all reason, passive income is often considered to be the holy grail of investing, as well as the key to long-term wealth creation and wealth protection. The main benefit of selflender is that it is recurring income, typically generated month after month without a lot of effort by you. Building wealth and becoming rich shouldn’t talk about extracting every last bit of your own energy, your own resources as well as your own money as there is always a restriction towards the extent you can do that. Tapping in to the effective generation and utilize of passive income is a critical step on the way to wealth creation. Begin this element of you wealth creation journey around is humanly possible i.e. now!