Why keep working hard, paying the highest amount of taxes possible when you can work smarter?
The goal is to get your passive income to match, at some point in your career, your active income and that’s what we’re going to be talking about today….exactly how to do it.
3 Types of Income
Let’s discuss the basics when it comes to earning money.
There are only three types of income
- active (earned) income
- passive income
- portfolio income
1. Active income
Active or “earned” income is the most familiar to us as it’s what we make while we work at our jobs. It is also the highest taxed of the three income types. Unfortunately, we focus all of our efforts on earning this type of income which causes us to pay the highest amount of tax.
If you earn active income ONLY, you’re trading your time for money.
2. Passive Income
Passive income is income derived from a rental property, limited partnership or other enterprise in which he or she is not actively involved.
Passive income from real estate is not subject to high effective tax rates. Why? It’s typically sheltered by depreciation which results in a lower effective tax rate compared to earned income.
3. Portfolio income
Portfolio income is generated from dividends, interest, and capital gains from selling stocks.
Education Doesn’t Prepare Us
Unfortunately our education system doesn’t prepare us financially. It ONLY focuses on earning active income.
This includes
- Work
- Labor
- Time
They teach us how to work and trade our time for money. Again, this type of income is the MOST highly taxed.
For Example, the Mr Smith gradates with a Bachelor’s Degree and is making $100,000 in their office job. He’s so excited and tells his friends that he’s making $8333 a month and doesn’t have to live off Ramen noodles anymore.
Little does he know that he’s getting ready to only focus on work that trades his time for money. If they give him $8333 a month, then the government is going to take 24% of that money. Uncle Sam is going to get his share no matter what.
In Mr. Smith’s case, $2000 comes off his $8333 a month leaving him with $6333 a month. Unfortunately, most people don’t even know what their taxes are.
If he was earning $8333 a month in all passive income, only $1250 would be taxed so he’d end up with $7083. Which would you rather have?
Most people have never been taught about active income and taxes. I know I wasn’t
You Still Need Active Income
Now, you can’t just go out and make passive income today. You need the active income first. Also we need workers. People need to work as it gives them a purpose. Even if I had more money than I knew what to do with, you’d still see me working (only difference is work that I’m passionate about not about how much I’m making).
Financial Freedom
I thought the way to get there was hiring a financial advisor but after awhile I learned they were pitching their products and services for their commissions. They did do a good job though of laying out investing advice with regards to retirement plans. Only thing was the financial advisor focused on active income only and gave different scenarios of how compound interest would cause my money to grow after I worked for 30-40 years.
For most of us, this is the only financial advice we know about…work our entire live, invest our money, hopefully have enough saved to retire and never run out.
My financial planner nor anyone else ever mentioned passive income, specifically real estate passive income. If you want to someday experience financial freedom, then you must have passive income coming in.
We call Real Estate Syndication investing mailbox money and a great form of passive income.
Real Estate Investing For Passive Income
Whether you realize it or not, everybody is an investor. People are constantly investing their time and energy and exchanging it for money.
What you have to learn is how to invest your money so that it continues making money so that you don’t have to invest your time for it to grow.
Also there are many friends of mine that I talk to that have cash that they’re sitting on. When I ask them about that, they tell me that it’s for a “rainy day.”
Cash money is going down in value. If you think saving it will get you somewhere, it won’t. Unless you enjoy your money not growing.
Get rid of the money and buy hard assets.
Summary
If you want to stop trading your time for money then you’ve got to get out of playing the active game. The active income game that is. I want you to go all in playing the passive game.
Invest in yourself, focus on growing your active income and begin putting money on the side. Once it grows then buy assets that are going to go up in value and start paying you passive money on a routine basis.
Do you know what holds most people back from doing this? FEAR. That’s right, fear. Any book on being successful or any person that’s made it will tell you the same thing.
It starts with a mindset shift. It takes courage to deplete your cash reserves and put it in something such as real estate.
It’s up to you. You’ve got to make a choice.
Do you continue to let your money sit in a bank and die or not?
If you are ready to begin replacing your active income with passive then join Passport REI Investor Club.
