Before you begin learning money vehicles it is important to ask yourself, what income do you work for? Why is this important? Short answer: Taxes.
For those of you who don’t know, taxes are your single largest expense. Over 90% pay more taxes than they should, simply because they don’t understand tax law.
I’m not going to get into the boring subject of taxes but just know, the income class you work for has a huge impact on the tax you pay.
Many are not aware of this hidden secret and that’s the very reason why they struggle.
In the real world, there’s three income classes that makes up the world of money. They are earn income, passive income, and portfolio income. Passive income is important because it is the least tax income. Passive income is also important because it plays hand to hand with our tax laws.
If you understand the tax law, you’ve realize 90% of the tax breaks is favored for passive income earners. Below are overview examples of these classes. Learn them all and choose which one best fits you.
Incomes that makes up the world of Money
1.Earned income: Income from your job known as labor. ( Highest taxed income).
2.Portfolio income: Income from stocks, bonds, and Cd’s usually known as paper assets ( Second highest taxed income).
3.Passive income: Income from Real Estate, royalties, and Business. (lowest taxed, but if used correctly not taxed at all).
You might have guessed that most people work for earned income. The problem with this type of income is it’s the highest taxed income. The reason for this is because governments wants to encourages more people to become entrepreneurs so the biggest tax breaks are placed on the investment side of the quadrant(B&I).
Another reason is, entrepreneurs are willing to take on more risk and challenges that the average employee won’t so they are rewarded for this also.
Some of you may think this isn’t fair but just stop and think for a minute, would you give more tax credit to someone who does less work that you need done or more? And in these simple terms, this is how the tax breaks work and is also the reason why many people struggle all their lives when they choose to work for earn income.
Portfolio income is income from paper assets. Examples of paper assets are stocks, bonds, and Cd’s. The problem with paper assets is most are low return vehicles, and their interest are subject to the fluctuation of the economy. If your plan is to get high returns on your investment than paper assets in most cases may not be for you.
Finally, we have my most favorite income, passive income, the most important income of all.Passive income is important because it determines how much money you keep, how much you pay in taxes, and how early in life you retire. Passive income is income once set correctly keeps generating income for years to come.
Examples of passive income are investment property, business, royalties , and dividend stocks. If you want to learn more on how this work you read Cash flow Quadrant written by Robert T. Kiyosaki which is highly recommend book.
In this book he goes more in-depth on the subject. You can get a copy at a local book store near you or at amazon.com click here. If you are truly serious about mastering the art of money then Cash flow Quadrant is a must read.
In my next post I will discuss the importance of leverage. I will explain how it works, how you can use it, and how it relates to your life.The next post is an important piece, so stay tune.
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Manny
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