A 101 on Incomes

Many people are not educating themselves about money and how to become rich with a higher income. What is more surprising is that even highly educated and technical people lack financial knowledge like the working class. Education of this kind is not what you study in grad school or college; it is something that you learn working with successful people or through experience.

There are many ways to earn your income, they are:

  • Active or earned income: This is the income that you earn from working, you get paid for the work you do which is when you get your pay check. Earned income is considered as the worst type of income as even pensions are considered as active income and taxed. Moreover, the earned income has the highest tax rate which is in the range of 10 to 35%. Additionally, social security, medical insurance, and other taxes are included, and you will pay close to 50% of your income on taxes. The major ramification of this type of incomes is that you have no control over it other than cutting back on expenses. Also, it is hard to get rick with only this type of income due to high tax rates and the amount of time spent working for the pay check. Examples of active income are a bonus, pension, salary, and wages.
  • Passive income: This is the income that you derive from the assets you have. Some of the examples are income from rent. Selling IP or intellectual property, income from business if you are not actively involved in everyday activities. When it comes to tax implications, this type of income gets the best deal as it helps to build wealth. Some of the taxes are taxable while others are not. Internet-based earning is not taxable while royalties are considered taxable. Rent is the taxed lowest as it brings in cash and hence it is best to keep it long-term to derive passive income.
  • Portfolio income: It is also known as the capital gains and is the money that you make after selling an investment for a profit. Bonds, mutual funds, stocks, and shares, selling real estate and selling cars are some of the examples of passive income. The tax that you pay for this is about 10 to 20% if the investment is made for more than a year and if held for less than a year it all portfolio incomes other than Medicare or social security is taxed as earned income. One major advantage for people is that if you have incurred a loss in other investments capital gains can neutralize it. Portfolio income is not seen as bad as earned income, but one must be aware of the pitfalls before investing in it.

To conclude, the super-rich has become rich not because they make loads of money as they are taxed equally.  It is because they have invested the earned money wisely and acquired big businesses. They also know how to manage the assets as they are financially educated and know things to avoid.  It is important to understand the different types of income and pick the type that is going to suit you and help you earn profits.  Plan the different types of incomes you can earn, chart out a plan and start slow to reach your goal.  Make sure you educate yourself about income, wealth and money!