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Last updated: March 19, Why knowing the differences between the three types of income will increase your financial IQ. We would play for hours exchanging four green houses for one red hotel. Buried in that simple formula is a powerful lesson, a lesson that has served me well throughout my adult life.
That was one of the first, and most important, lessons in financial education I ever learned: the value of cash flow. You purchase a property and collect rents best signals for binary options someone lands on your property.
- It was a game-changing moment for me since this realization helped me begin this amazing online journey that I am so grateful for.
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In order to make money, much like in real life, you improve the value of your properties and eventually sell them. When you move on from single-family homes green houses and into larger properties like duplexes, 4-plexes, and, eventually, apartment complexes red hotelsyou increase your cash flow.
Thankfully, I learned about cash flow early at an early age by playing that game. Most people are given advice like to go to school, get a safe secure job, invest in a diversified portfolio of stocks, bonds and mutual funds.
And one of the key reasons I became wealthy is because I understand the three different types of income. The Three Types of Income 1. Earned income If you have a job and receive a paycheck, you make your money through earned income.
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When you earn money through a paycheck, you are exchanging time for money. For example, when you work as an employee as a web designer, a grocery store cashier, or a police officer, you are getting paid a predetermined amount of money X to do that job for a certain amount of time Y.
Here in the United States, the amount of money is negotiated between the employee and employer and the amount of time required for a full-time employee is forty hours per week.
If they want to make more money, they need to work more hours at their full-time job or through a part-time job or freelancer. Portfolio income Where earned income is acquired by exchanging time for money, portfolio income is made through capital gains. As an example, when someone buys stock in a corporation at a given price, they plan on selling that same stock at a higher price in the future.
That capital gains is their profit. This is how stock traders traditionally make their money.
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They invest money in stocks they feel are undervalued now with the expectation that when the prices rises they can sell those same stocks for a capital all kinds of making money in. To summarize, an asset puts money in your pocket regardless of whether you work or not. The same people who were told to go to school, get a safe, secure job and invest for the long-term in the stock market were also told that their house is an asset.
The belief was that your house always goes up in value. Some people saw the value of their home cut in half virtually Earn Money. Where an asset puts money in your pocket, a liability takes money out. Even if you own your house, you still have upkeep, property taxes and utilities to pay for.
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If your house was an asset, it would make money for you, not take money from you. For people who make a living with ordinary earned income their greatest expense is all kinds of making money in taxes. Earned income is the most highly taxed of all three types of income.
Keep More of What You Make Though you would still make a lot of money, imagine paying nothing in taxes—legally. Passive income is taxed less than both ordinary earned income and portfolio income because of reasons found in the tax code.
Three Types of Income
The more jobs there are, the more workers are required to fill those jobs. The more people that are working, the more taxes that can be collected. Conclusion Get CASHFLOW — click here You should have a solid understanding of the three types of income—earned, portfolio and passive—and a basic understanding of how taxes affects each income stream.
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The purpose of this post was to educate you on the different income options available to you.