SHOW NOTES – Income Creation 101: How to Accumulate Wealth
Plus, a defensive stock idea that bucks the trend
Weekly News Wrap + How to Accumulate Wealth
On this week’s show, Jerry Robinson shares the secret to wealth creation.
There is really only one way to truly get ahead (unless you marry a wealthy person or inherit a fortune from Grandma). But first, Jerry reflects on July 4th and provides you with a wrap of the most important news headlines of the week, including the chaos in Egypt and the latest on the NSA spying scandal.
Income Creation 101: How to Accumulate Wealth
In order to know how to accumulate wealth, you must understand what wealth is. Jerry teaches you the three types of income recognized by the IRS (along with their tax advantages), and then he discusses two other types of income that are the secret to building wealth. Then, Jerry describes the process of using different income streams to accumulate wealth in today’s economy.
The Three Types of IRS Income
The IRS recognizes three types of income for taxation purposes: active (earned) income, portfolio income, and passive income. It is vital to understand each and determine the role they will play in your wealth accumulation strategy.
1. Active (Earned) Income. Also known as linear income. Compensation earned from your labor, employment, or material involvement in a business. It includes: Small business income, salaries (W-2 income), commissioned sales income, tips, and consulting income. Active income is the highest taxed form of income.
2. Portfolio Income. Portfolio income is composed of capital gains, royalties earned from books or patents, interest, and dividend income. This type of income is not created through normal business activity. Portfolio income is often taxed at a lower rate than active income, depending on how long you hold the investment prior to selling it.
3. Passive Income. Passive income is derived from business investments, such as a rental property or limited partnerships, in which you are not actively involved. Examples include net rental income (real estate or equipment) or business income from a business in which you do not materially participate. Basically, passive income is not “earned” by your time and effort. Passive income is usually taxed at the lowest rates and offers the highest number of potential tax deductions.
Two Types of Income that Lead to Wealth
Passive income is clearly the best type of “IRS income” for accumulating wealth. But there are two other types of income (both of which fall into one of three IRS income types) that will help you build wealth in the most effective and efficient way possible. These income strategies are utilized by those who truly break free financially.
1. Residual Income. This is recurring income. Residual income is an ongoing income stream that you receive for work that you did in the past. Insurance agents are a great example of the power of residual income. For example, when a health insurance agent sells an insurance policy, he receives a recurring, or residual, commission every time the individual pays his monthly premium. The insurance agent worked hard up front to secure the client and is then rewarded with an ongoing income stream that continues as long as the client renews his policy! With residual income, you work hard upfront and then enjoy an ongoing stream of income month after month or year after year, often with little maintenance.
2. Leveraged Income. This is another extremely powerful form of income that comes from leveraging someone else’s labor, talents, or abilities.
The Three Sources of ALL Income
There are three (and only three) sources of all income in the world. There are 22 STREAMS of income (at least), but all the streams flow from one of the following three sources:
1. Real Estate. Rents and capital gains
2. Paper Assets. Stocks, bonds, annuities, savings accounts, and many others
3. Business Income. Any kind of business – brick and mortar shop, online retailer, affiliate marketer, the sky is the limit.
“But wait, Jerry! I have an awesome job that pays well… that’s a source of income too!”
Yes, you are right. W-2 employees and 1099 contractors obtain their pay through someone else’s business income (which is income source #3). There is nothing wrong with having a W-2 job, and I never advocate that anyone quit their job. On the other hand, I would say that if you desire to accumulate wealth, you must seek ways to leverage others to help you create residual income (and this is not done through the typical 40-hr per week job).
Change How You Spend Your Money to Accumulate Wealth
There are three ways to spend your money in this world:
1) Stuff – consumables, gadgets, entertainment, vices
2) Liabilities – cars, boats, motorcycles, furniture, big screen TVs (with low monthly payments!!);
3) Assets – houses, land, livestock, apartment complexes, your own business, shares in someone else’s business.
One major difference in the poor, middle class, and the wealthy is how they spend their money.
When I say “poor”, I’m not necessarily talking about someone living in abject poverty. I am talking about the poor mindset. I am talking about someone who, although may have all their needs met, will never break free financially. The poor spend their money on stuff, the middle class spend their money on liabilities, and the wealthy spend their money on assets (appreciating assets nonetheless!).
How are you spending your money? Are you living paycheck to paycheck?
Are you accumulating stuff, liabilities, or assets?
The Ultimate Secret: How to Accumulate Wealth
So, we have talked about types of income, sources of income, and how to spend your money, but what is the secret to creating wealth? Well, the secret lies in a three-step process:
1. Create a sizable amount of cash flow. See tips in the above sections… think residual cash flow and leveraged cash flow to free up your time to create more cash flow!
2. Invest the cash flow into appreciating assets for more cash flow and tax benefits. Real estate, another business, hard assets, paper assets (be sure to understand the risk involved in each before investing)
3. Rinse and Repeat. Repeat the process until you have your money working for you to continually create more cash flow. The result… WEALTH.
Time is the Ultimate Commodity of the Wealthy
Every person, poor or wealthy or somewhere in between, is given 24 hours in a day. Your success will be found in how you choose to use those 24 hours. Thomas Jefferson said:
“I’m a great believer in luck, and I find the harder I work the more I have of it.”
Some people use their free time to watch the Kardashians on TV or see what their Facebook friend did over the weekend. Others use their free time to become more educated, researching money-making ideas or implementing a new business plan. You have to make something happen if you are going to break free financially. There are those who watch things happen, those who talk about what happened, and those who make things happen. Which are you?
If you want to “make it happen”, start with your mindset and your conversation.
- Big people talk about ideas
- Average people talk about things
- Small people talk about other people
Begin talking about ideas, and eventually you will see those ideas turn into action, and action turn into wealth!
Never Miss An Episode!
John Bearss – Retirement Specialist
In this week’s Retirement Minute segment, veteran retirement specialist John Bearss completes his series on common Social Security Myths. This week, John addresses the myth, “I don’t have to pay taxes on my Social Security benefits.” Click here for the latest on retirement issues from John Bearss, including other common myths about Social Security and estate planning essentials.