One of the secrets of getting rich and creating wealth is always to understand the different ways that income can be generated. It’s often claimed that the lower and middle-class work for money whilst the rich have money work for them. The true secret to wealth creation lies within this simple statement. Imagine, instead of you working for money that you instead made every dollar work for you 40hrs a week. Better still, imagine each and every dollar working for you 24/7 i.e. 168hrs/week. Determining the best ways you can make money meet your needs is an important step on the road to wealth creation.
In the US, the Internal Revenue Service (IRS) government agency responsible for tax collection and enforcement, passive income into three broad types: active (earned) income, residual income, and portfolio income. Money you make (besides maybe winning the lottery or receiving an inheritance) will fall into one of these income categories. In order to learn how to become rich and create wealth it’s crucial that you learn how to generate multiple streams of residual income.
Residual income is income generated from the trade or business, which fails to require the earner to sign up. It is often investment income (i.e. income that is certainly not obtained through working) although not exclusively. The central tenet of this kind of income is that it can get to carry on whether you continue working or not. While you near retirement you happen to be most definitely wanting to replace earned income with passive, unearned income. The secret to wealth creation earlier on in your life is passive income; 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 is that the entire education product is actually basically designed to teach us to accomplish a job and hence rely largely on earned income. This works for governments as this kind of income generates large volumes of tax and can not meet your needs if you’re focus is on how to become rich and wealth building. However, to become rich and create wealth you may be required to cross the chasm from relying on earned income only.
Property & Business – Causes of Residual Income. The passive type of income is not really determined by your time. It really is dependent on the asset and also the management of that asset. Residual income requires leveraging of other peoples time and money. For instance, you can buy 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 like insurance, maintenance, property taxes, management fees etc) you would probably produce a net rental yield of $6,000/annum or $500/month. Now, subtract the price of the mortgage repayments of say $300/month using this so we reach a net rental income of $200 out of this. This can be $200 passive income you didn’t must trade your time and effort for.
Business can be a source of residual income. Many entrepreneurs begin running a business with the idea of starting a company in order to sell their stake for a few millions in say 5 years time. This dream will simply turn into a reality if you, the entrepreneur, could make yourself replaceable in order that the business’s future income generation is not really influenced by you. If you can do this than in a way you may have made a way to obtain passive income. For a business, to become true source of passive income it takes the right kind of systems and the right kind of people (besides you) operating those systems.
Finally, since residual income generating assets are usually actively controlled on your part the owner (e.g. a rental property or a business), you do have a say within the daily operations from the asset which may positively impact the level of income generated.
Residual Income – A Misnomer? Somehow, residual income is actually a misnomer because there is nothing truly passive about being in charge of a group of assets generating income. Whether it’s a home portfolio or a business you own and control, it is rarely if ever truly passive. It should take you to be involved at some level within the management of the asset. However, it’s passive in the sense which it will not require your everyday direct involvement (or at best it shouldn’t anyway!)
To be wealthy, consider building leveraged/residual income by growing the dimensions and amount of your network rather than simply growing your skills/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.Recurring Income is a type of passive income. The terms Residual Income and Recurring Income are often used interchangeably; however, there is a subtle yet important difference between the two. It is income that is generated every now and then from work done once i.e. recurring payments that you receive long after the first product/sale is created. Residual income is generally in specific amounts and paid at regular intervals. Some demonstration of residual income include:-
– Royalties/earnings through the publishing of the book.
– Renewal commissions on financial products paid to your 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
Utilization of Other People’s Resources as well as other People’s Money are key ingredient needed to generate residual income. Other People’s Money buys you time (a key limiting factor of earned income in wealth creation). In a sense, usage of other people’s resources offers you back your time. When it comes to raising capital, businesses that generate passive income usually attracts the largest quantity of Other People’s Money. It is because it really is generally possible to closely approximate the return (or at best the danger) you eammng expect from passive investments and thus banks etc., will frequently fund passive investment opportunities. An excellent business plan backed by strong management will usually attract angel investors or venture capital money. And real estate property is often acquired using a small down payment (20% or less in some instances) with most of the money borrowed from a bank typically.
Tax Benefits associated with Passive Income – Residual income investments often allow for the best favorable tax treatment if structured correctly. For example, corporations are able to use their profits to buy other passive investments (real estate property, for example), and avail of tax deductions in the process. And property can be “traded” for larger property, with taxes deferred indefinitely. The tax paid on residual income will be different based on the individuals personal tax bracket and corporate structures utilized. However, for the purposes of illustration we could claim that an average of 20% effective tax on passive investments would be a reasonable assumption.
Once and for all reason, home based business is often regarded as being the holy grail of investing, and the key to long term wealth creation and wealth protection. The key benefit from passive income is it is recurring income, typically generated month after month without significant amounts of effort on your part. Building wealth and becoming rich shouldn’t be about extracting every last bit of your personal energy, your very own resources and your own money while there is always a restriction towards the extent you can do this. Tapping into the effective generation and use of passive income is actually a critical step on the road to wealth creation. Begin this a part of you wealth creation journey as early as is humanly possible i.e. now!