The case for multiple income streams has been clearly presented over the past few years. The global economy and the effects of this most recent recession should have clearly exposed the damage possible if you rely on just one type of income. Did you know there are more than one type of financial stream? Do you know the tax ramifications of each option?
We'll pull some more excellent information from Robert Kiyosaki's newest book. The title is "Why "A" Students Work For "C" Students And "B" Students Work For The Government." There are actually three types of income.
Ordinary income is job related. You get this type of compensation from a paycheck. If you are self employed it turns out to be what ever is left after you pay the bills. Even for professionals who earn incredibly high yearly salaries, if that salary is dependent on you doing that job to keep the money flowing, it is ordinary income.
When your children are taught in school to get good grades so they can get into a good college so they can get a good job, schools are teaching students to expect ordinary income. When they are taught to save money, they are being given another lesson in ordinary income production. When you are told to invest in a 401k, that is another example of ordinary income.
Ordinary income is taxed at the highest level. Even when you do withdraw from that 401k. Most tax payers should have learned that lesson again in January of this year. Social Security taxes went up. Again,a hit to the wallet.
So why is this the only type of compensation taught in schools? And even then, just barely? Why don't they teach about multiple income streams? Maybe because the teachers were never given those lessons themselves?
Portfolio income would come from sources such as the stock market or maybe investment real estate, depending on how you handle property. Another example that got so many people in trouble was when a real estate agent told someone to buy a house that was really too much for them because, "real estate always goes up in value." He was advising them to buy now in hopes of selling high later. Those people paid a high price twice. Portfolio income can mean capitol gains. Buy low, sell high.
The stock market is the largest example of portfolio income. You buy a stock in hopes of selling it at a higher price later, down the road. In 2013, taxes on portfolio income went up as well. For example, the new version of "rich", those earning over $200,000 per year saw taxes on portfolio income go up around 60%. That included 3.8% for the Affordable Health Care Act.
Passive income is the third type. An easier way to understand it would be cash flow. The most common type for most people would be rental real estate. Owners of these properties are looking for positive monthly cash flow every month. Their houses or building may go up in value or they may go down. It doesn't matter. As long as the rent comes through every month and the net is positive, it is all good.
Robert Kiyosaki uses the game of Monopoly often as a teaching tool to understand passive income. You buy a property and put a house on it. When another player lands on that spot, you get paid rent. If you trade up to a hotel, you get more rent. Every time. A simple teaching tool from an old game. No tuition involved. Just the one time cost of that board and some time.
Passive income is taxed at the lowest rate. This type of income often escapes tax raises. Why is this? The government wants private entrepreneurs to provide quality housing, so they actually give tax breaks for rental income. They have proven to be miserable failures in the public housing arena so they want private enterprise to do it right. That could be a good example for other "public works."
Mr. Kiyosaki offers the example of Apple computers to explain passive income as well. Steve Jobs yearly salary was $1.00. His ordinary income was a buck. Thousands of people bought stock in his company hoping for it to go up in value so they could sell it for a big profit at some point. Capitol gains for them, also known as portfolio income.
He earned passive income on the sale of that stock. Every month, whether he showed up or not. Every month. Mailbox money.
Other examples of passive income would be royalties, or stock in a company that threw off dividends month after month. Money that was not dependent upon your ability to perform. There are many more possibilities. As you invest time in your own financial education, you'll see more opportunities for that passive income.
Multiple income streams are the best firewall for your retirement. A market crash cannot wipe out your hard earned assets. Job loss cannot cripple your lifestyle. Today we touched on part of it. The three types of income are taxed at different levels. Ultimately it is what you keep that counts. Not what you earn.
These multiple income streams will not come about overnight. But they can be built. The subject is too large for one page. We'll continue to build on this page as we tie it all together.
Remember that ordinary income gets taxed the most. Portfolio income gets a bit of a break from the tax code. Passive income is the real goal. Favorable taxation and freedom from having to be the on call driving force to produce, make it the best form of income.
Your own map to multiple income streams will probably include this type. Financial knowledge is the most important step.