Mental Health

 One of many keys to getting rich and creating wealth is to understand the different ways in which income may be generated. It's often said that the lower and middle-class benefit money whilst the rich have money benefit them. The important thing to wealth creation lies in this Mental Health statement.

Imagine, as opposed to you employed by money that you instead made every dollar work for you 40hrs a week. On top of that, imagine each and every dollar employed by you 24/7 i.e. 168hrs/week. Working out the very best ways you possibly can make money work for you is a significant step on the road to wealth creation.

In the US, the Internal Revenue Service (IRS) government agency responsible for tax collection and enforcement, categorizes income into three broad types: active (earned) income, passive income, and portfolio income. Any money you ever make (other than maybe winning the lottery or receiving an inheritance) will fall into one of these income categories. To be able to learn how to become rich and create wealth it's vital that you understand how to generate multiple streams of passive income.

Crossing the Chasm

Passive income is income generated from a trade or business, which does not require the earner to participate. It's often investment income (i.e. income that is not obtained through working) however, not exclusively. The central tenet of this kind of income is so it can get to continue whether you continue working or not. As you near retirement you are almost certainly seeking to replace earned income with passive, unearned income. The key to wealth creation earlier on in life is passive income; positive cash-flow generated by assets that you control or own.

One of many reasons people find it difficult to help make the leap from earned income to more passive sources of income is that the whole education system is actually more or less designed to show us to complete work and hence rely largely on earned income. This works for governments as this type of income generates large volumes of tax but will not work for you if you're focus is on how best to become rich and wealth building. However, to become rich and create wealth you is going to be needed to cross the chasm from relying on earned income only.

Real Estate & Business - Sourced elements of Passive Income

The passive type of income isn't influenced by your time. It's influenced by the asset and the management of this asset. Passive income requires leveraging of other peoples time and money. For example, you might obtain a rental property for $100,000 employing a 30% down-payment and borrow 70% from the bank. Assuming this property generates a 6% Net Yield (Gross Yield minus all Operational Costs such as for instance insurance, maintenance, property taxes, management fees etc) you'd generate 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 arrive at a net rental income of $200 from this. This really is $200 passive income you didn't need to trade your own time for.

Business can be quite a supply of passive income. Many entrepreneurs start out running a business with the notion of starting a business in order to sell their stake for many millions in say 5 years time. This dream will simply become a fact in the event that you, the entrepreneur, will make yourself replaceable so that the business's future income generation isn't influenced by you. If you are able to do this than in ways you've created a supply of passive income. For a business, to become true supply of passive income it takes the best kind of systems and the best kind of individuals (other than you) operating those systems.

Finally, since passive income generating assets are often actively controlled by you the master (e.g. a rental property or a business), you've a say in the day-to-day operations of the asset which can positively impact the degree of income generated.

Passive Income - A Misnomer?

For some reason, passive income is a misnomer as there is nothing truly passive about being responsible for several assets generating income. Whether it's home portfolio or a business you have and control, it's rarely if truly passive. It will require you to be engaged at some level in the management of the asset. However, it's passive in the sense that it doesn't require your day-to-day direct involvement (or at the very least it shouldn't anyway!)

To become wealthy, consider building leveraged/passive income by growing the size and level of one's network in place 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 cards and building relationships!

Residual Income = A Form of Passive Income

Residual Incomeis an application of passive income. The terms Passive Income and Residual Income in many cases are used interchangeably; however, there is a simple yet important difference involving the two. It's income that is generated from time to time from work done once i.e. recurring payments that you get long after the first product/sale is made. Residual income is normally in specific amounts and paid at regular intervals. Some example of residual income include:-

- Royalties/earnings from the publishing of a book.

- Renewal commissions on financial products paid to a financial advisor.

- Rentals from home letting.

- Revenue generated in multi level marketing networks.

Usage of Other People's Resources and Other People's Money

Usage of Other People's Resources and Other People's Money are key ingredient needed to generate passive income. Other People's Money buys you time (a key limiting factor of earned income in wealth creation). In a sense, use 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 amount of Other People's Money. The reason being it's generally possible to closely approximate the return (or at the very least the risk) you are able to expect from passive investments and so banks etc., will often fund passive investment opportunities. A good business plan backed by strong management will most likely attract angel investors or venture capital money. And real estate can often be acquired with a small down payment (20% or less in some cases) with nearly all the amount of money borrowed from a bank typically.

Tax Advantages of Passive Income

Passive income investments often enable the absolute most favorable tax treatment if structured correctly. For example, corporations can use their profits to invest in other passive investments (real estate, for example), and avail of tax deductions in the process. And real estate may be "traded" for larger real estate, with taxes deferred indefinitely. The tax paid on passive income will be different based on the individual's personal tax bracket and corporate structures utilized. However, for the purposes of illustration we will claim that an average of 20% effective tax on passive investments would have been a reasonable assumption.

In summary:

For justification, passive income is usually regarded as being the holy grail of investing, and the important thing to long-term wealth creation and wealth protection. The major benefit of passive income is it is recurring income, typically generated month after month with no great deal of effort by you. Building wealth and becoming rich shouldn't be about extracting every last bit of your personal energy, your own personal resources and your own personal money as there is always a limit to the extent you are able to do this. Tapping into the effective generation and use of passive income is a critical step on the road to wealth creation. Begin this part of you wealth creation journey as early as is humanly possible i.e. now!

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