Among the keys to getting rich and creating wealth is always to be aware of the different methods income can be generated. It’s often said that the lower and middle-class work for money whilst the rich have money work for them. The real key to wealth creation lies within this simple statement. Imagine, instead of you doing work for money that you instead made every dollar work for you 40hrs every week. Better still, imagine each and every dollar working for you 24/7 i.e. 168hrs/week. Determining the best ways you can generate income work for you is an important step on the way to wealth creation.
In america, the inner Revenue Service (IRS) government agency responsible for tax collection and enforcement, passive income into three broad types: active (earned) income, passive income, and portfolio income. Any money you ever make (apart from maybe winning the lottery or receiving an inheritance) will belong to one of those income categories. In order to understand how to become rich and create wealth it’s crucial that you learn how to generate multiple streams of residual income.
Passive income is income generated coming from a trade or business, which does not need the earner to sign up. It is usually investment income (i.e. income that is certainly not obtained through working) however, not exclusively. The central tenet of this type of income is that it can get to carry on whether you continue working or not. When you near retirement you might be most definitely wanting to replace earned income with passive, unearned income. The secret to wealth creation earlier on in life is passive income; positive cash-flow generated by assets that you control or own.
A primary reason people find it hard to make the leap from earned income to more passive causes of income is the fact that entire education system is actually virtually created to teach us to do employment so therefore rely largely on earned income. This works best for governments as this sort of income generates large volumes of tax and can not work for you if you’re focus is regarding how to become rich and wealth building. However, to be rich and produce wealth you may be needed to cross the chasm from depending on earned income only.
Real Estate & Business – Types of Passive Income. The passive form of income is not really dependent on your time and energy. It is dependent on the asset as well as the management of that asset. Residual income requires leveraging of other peoples time and expense. For example, you could invest in a rental property for $100,000 using a 30% down-payment and borrow 70% through 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 will produce a net rental yield of $6,000/annum or $500/month. Now, subtract the price of the mortgage repayments of say $300/month from this and we reach a net rental income of $200 out of this. This can be $200 passive income you didn’t have to trade your time and energy for.
Business can be quite a way to obtain residual income. Many entrepreneurs begin in business with the concept of starting a company in order to sell their stake for a few millions in say five years time. This dream is only going to turn into a reality in the event you, the entrepreneur, will make yourself replaceable so the business’s future income generation will not be determined by you. If this can be achieved 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 appropriate people (other than you) operating those systems.
Finally, since passive income generating assets are usually actively controlled on your part the property owner (e.g. a rental property or perhaps a business), there is a say in the day-to-day operations of the asset which may positively impact the amount of income generated.
Residual Income – A Misnomer? In some manner, residual income is a misnomer as there is nothing truly passive about being accountable for a group of assets generating income. Whether it’s a home portfolio or perhaps a business you own and control, it is actually rarely if ever truly passive. It should take you to be involved at some level within the handling of the asset. However, it’s passive within the sense which it does not require your daily direct involvement (or at least it shouldn’t anyway!)
To be wealthy, consider building leveraged/passive income by growing the size and style and amount of your network instead of 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 card printing and building relationships!
Residual Income = A Form of Residual Income.Recurring Income is a kind of residual income. The terms Residual Income and Recurring Income are often used interchangeably; however, you will find a subtle yet important difference between both. It is income that is generated every now and then from work done once i.e. recurring payments that you get long after the initial product/sale is produced. Recurring income is usually in specific amounts and paid at regular intervals. Some demonstration of residual income include:-
– Royalties/earnings from the publishing of the book.
– Renewal commissions on financial products paid to some financial advisor.
– Rentals from a 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 and 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 provides you with back your time and energy. When it comes to raising capital, businesses that generate passive income usually attracts the greatest amount of Other People’s Money. The reason being it is generally possible to closely approximate the return (or at best the risk) 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 most likely attract angel investors or venture capital money. And real estate property can often be acquired using a small down payment (20% or less in some instances) with the majority of the money borrowed from the bank typically.
Tax Benefits of Residual Income – Residual income investments often allow for favorable tax treatment if structured correctly. For example, corporations are able to use their profits to invest in other passive investments (property, as an example), and avail of tax deductions along the way. And real estate property can be “traded” for larger real estate property, with taxes deferred indefinitely. The tax paid on residual income will vary based on the individuals personal tax bracket and corporate structures utilized. However, for the purposes of illustration we could claim that typically 20% effective tax on passive investments would be a reasonable assumption.
For good reason, home based business is frequently considered to be the holy grail of investing, and the answer to long-term wealth creation and wealth protection. The key benefit from residual income is it is recurring income, typically generated month after month without a lot of effort on your part. Building wealth and becoming rich shouldn’t be about extracting every last bit of your energy, your very own resources and your own money as there is always a limit for the extent you can do this. Tapping into the effective generation and utilize of residual income is really a critical step on the road to wealth creation. Begin this element of you wealth creation journey around is humanly possible i.e. now!