Three Types of Income

Throughput the weeks I have touched upon the subject of creating more than one plan for yourself in order to be successful you must always have a plan no matter the situation, lets refer back to the three types of lifestyles : Secure, Comfortable and Rich.  Just as I had said in order to prepare for being rich, you must prepare for being secure and comfortable as well, I cannot stress enough that one willing to take these steps must create each portfolio for themself.  Today I would like to introduce to you the Three types of Income :

 

 

1. Ordinary earned incomeThis type of income is what mainly the poor, or middle class focus on. This income is generated from wages, or paychecks from a secure or comfortable job title that you may have aqquired with or without post secondary degrees. This income is also the highest taxed income , which makes it harder for you to become rich by simply saving your money.
2. Passive income
This type of income is usually derived from many different entities. One may earn a passive income from license agreements, or patents to a product, or even through real estate.  Real estate is a major factor in creating your passive income. This type of income has many tax benefits.

3. Portfolio income
This type of income is what we will call "Paper Assets." Paper assets such as : Stocks, Bonds and Mutual funds. On an investment stand point this portfolio income is by far the most popular, this is because of new technology, everything as I mentioned is paper assets, it is far easier to maintain and track tons of investments because it is all generated online through markets.

 

 

From the diagram drawn above , this is the direct corrolation between the three types on income. Simple really, you want your ordinary income, to convert into passive and portfolio income. Like I mentioned earlier the difference between the rich, and the middle class/poor is that the rich focus on their portfolio and passive income, where the poor and middle class focus on their ordinary income. Let me give you an example :

Say you have landed yourself a job at a local bank, the job seems secure enough good pay so you keep it, you are generating an ordinary income. With these wages you tell yourself its a good time to invest in the real estate market, so you buy a house worth $80,000 for $60,000 on a forclosure auction. You now have generated $20,000 profit for simply investing in the porperty, you find a new couple who would like to rent out the home for $1400 a month, now your simple investment has made you a profit of $20,000 and is also generating you a passive income because you now earn a monthly $1400 for rent.  With this new found cash you go to your financial advisor and say you want to invest in some stocks, mutual funds and or bonds. Remember investing is risky and does not always have a positive output, but a great investor knows how to invest in a good and bad market, but for this case we will say you made a profit of $30,000 on your initial investment. You can see through this example that your Ordinary income generated a Passive Income which then generated a Portfolio income. This brings back into play your assets paying off your assets creating strict profit for yourself, for further explination for any new followers to this blog please refer to earlier blog postings to get up to speed.

I want to leave you with the idea of creating your three types of income, and stump you with a question. From the example listed above, how can one create a profit but seem penniless on paper?

Education, Experience , Excess Cash

The concept I left you with prior to this blog post was the Three E's : Education, Experience , Excess Cash. I would like to further your knowledge on why these three E's are extremely essential in your journey towards becomming rich, in the exact order they are placed in.  We will start with :

Education : In life education is the key. Whether we would like to become great at something, or we would just like to further our knowledge about a subject , we do this by educating ourselves. "A Man willing to learn his whole life, will be the richest man."(Kiyosaki, 2013) Lets think of this logically, if you as a person are willing to never stop learning throughout the course of your life, do you believe that education can simply make you rich? No. It is how you use this education that will determine your success, this is where Experience  comes in.

Experience: Now that you have based yourself with all the education needed to start your journey, well you must now put it to use. The easiest way to grasp the 3 E's is to put it in terms of your educational map. For all those who have went, plan to go or who are currently in post-secondary schooling, many of your programs may offer a co-op.  Think of the three E's in terms of your program, first you need the Education so you have chosen your program, and are willing to educated yourself through it. Now that you have accomplished your first year and have furthered your knowledge it is time for your Experience this would be your co-op. Your school has set you up for success by using the three E's whether they knew it or not. Finally, once your co-op is done, your schooling is up, you've gotten all the Education and Experience you need, you have now set yourself up for the process of creating Excess Cash.

Excess Cash : Now we look at excess cash in the view of an investor, because in order to become a rich investor you need to have your assets pay off eachother, while your income your Excess Cash is exactly what it needs to be Excess. This is the money that when it comes in you can throw down on a worth investment , one that may take some risk , so this excess cash is money that can be lost, and it wont be needed to recover, because you've already bought assests that now pay eachother off and accumulate an income, where your excess cash generates its own income on its own.

I have laid out the three basics to further someones life in becomming rich. Now it is said that there is a rule called the 90/10 . This rule states that for every 90 Citizens only 10 will become rich. Why is that? If everyone knows the basics on becomming rich, learns the three E's , lives by them, what makes someone move from that 90 to the 10 % of those who become rich? I would like to encourage some feedback, on what you believe seperates someone between the 90/10 rule.