Income explained

13 Dec

Income Explained

 Income Explained

 

Webster’s dictionary defines income as money that is earned from work, investments, business, etc.  For the majority, when we think of income, it is the type that gets direct deposited into our checking account from our employer (Earned Income).  In order to speed up your path to financial freedom/early retirement, you need to focus your time and energy away from earned income and shift it towards the other two types, Portfolio and Passive Income.  After all, the more you keep, the more you can invest to eliminate your expenses.

 

Type of Income          Tax Implications          Leverage          Time

Earned Income                High      ~50%                     None                    Limited

Portfolio Income             Mid        ~20%                     Some                    Semi Limited

Passive Income                Low        ~0%                       Lots                      Infinite

 

 

Earned Income

Wages, tips, salary (W2 type)

Tax = Federal + FICA  (Your’s might be 32.65%—>   Fed 25%     FICA 7.65%)

Move companies to earn a higher wage/work harder to obtain a raise.

You earnings potential is a function of how many hours you can work and your rate. (I can only work 24 hours a day)

 

 

Portfolio Income

Dividends from stock, interest from back accounts, capital gains from the sale of stocks

Tax = Long term held ~10%     Short term held ~20%

Leverage the experience of your financial advisor or do your own research and invest yourself

You earnings potential is a function of how much capital you inject and the performance of those specific/finite investments

 

 

Passive Income

Rent, royalties, and recruitment (rental properties, original works such as books or songs, and businesses you create that you do not actively participate in).

Tax = Sometimes 0%    Your Guide to Every Tax Break the IRS Allows

Leverage the experience and efforts of others (they work for you).  Use the banks money–> 20% down on a rental property

You earnings potential is uncapped.  Purchase more rental properties, start more businesses, author another book

 

 

This blog will not necessary discuss ways to increase your Earned Income, but will  focus more on Portfolio and Passive Income.  Let’s place our limited time on where it counts the most!

 

Remember; pay off that debt, save and invest the rest, and join us on the other side and retire before you are dead.

 

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One Response to “Income explained”

  1. TnAndy January 7, 2014 at 6:31 pm #

    Will,

    Good to see somebody as young as you grasped this concept. Took me some years past 37 to “get it”, and the way I did was by doing my own taxes.

    Once I became self employed later in life, and was paying the “full nut” of social security, I started looking on HOW to reduce that…..Unearned income was the key. “Earning” income, cost me 43.3% of my income ( wife’s income put us right at the 28% tax bracket, so every dime I earned was at 28% ). Add in 15.3% social security, and you get 43.3.

    Not a whole lot of incentive to go get it when almost half went to the feds.

    So I got in the rental biz.

    You should point out in most cases, landlords are ACTIVE participants in rental income, not passive ( like investing in REITs )…..if you’re buying, doing the management, etc, that’s active as far as the Feds go.

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