Income is money earned through employment, business or investments. This income can be good income or bad income. For many of us good income means good salary or higher income and bad income means less salary or less income. So we divide income based on quantity and decide whether it is good or bad. What you may not know is types of income and its division in to good and bad income. So, let’s explore it.
There are three different types of income:
1) Earned income: Earned income is you working for money. It is the income that comes in the form of a paycheck (salary). It is also the type of income you ask for more of when you ask for a raise, bonus, overtime, commissions etc.
2) Portfolio income: Portfolio income is generally income from paper assets such as stocks, bonds, and mutual funds.
3) Passive income: Passive income is generally income from businesses or real estate. It can also be royalty income from patents (copy rights) or for use of your intellectual property such as songs, books, or other objects of intellectual value.
Out of these three types passive income and portfolio income is good income while Earned income is bad income.
Why Earned income is bad income?
Earned income is worst due to following reason:-
1. It is the highest taxed income and it is the income with the fewest controls over how much you pay in taxes and when you pay your taxes.
2. You personally have to work for it and it takes up your valuable time.
3. There is very little leverage in earned income. The primary way most people increase their earned income is by working harder.
4. There is often no residual value for you work. In other words, you work, get paid, and then have to work again to be paid again.
5. You will always remain slave.
Most of people today dreamed about high-paying jobs with lots of earned income. Teaching people to spend their lives working for earned income is like teaching someone to be a high-paid slave for the lifetime. Earned income is the income that you work the hardest for and you are allowed to keep the least of.
The trouble with working for earned income is that you have to keep working hard for it. Eventually a person working for portfolio and passive income will pass the earning potential of earned income because you can work less, earn more, and pay less and less in taxes when you work for portfolio and passive income.
Why Passive income is good income?
- For Passive income one has to work least.
- Passive income is tax least.
- You can have better leverage over your income.
- You can serve more and more number of people and earn more and more (Sky is limit)
- You will be master & can enjoy financial freedom.
Business owner has more control over taxes, the highest leverage potential and the most legal tax advantages.
If you want to be rich you have to work for right kind if income passive income (good income) but most of us join rat race and work for Earned income (bad income).
70 % Money
This is we called to Earned income which you receive in from a paycheck, “70 percent money.” The reason we called it 70 percent money because no matter how much money you earned, the government always took at least 30 percent of it or more in one way or another by imposing income tax, professional tax, service tax etc. As most people know, you are taxed when you earn, spend, save and invest.
So, we wonder why people spent their lives in search of a higher paying job or a pay raise. We can say, “When you get a raise, so does the government.” Spending your life working hard for 70 percent money was not the financially intelligent thing to do.
15 % Money
Many people today are working for 15 percent money, which is money from capital gains or appreciation of stocks and sometimes real estate.
Tax law for employee:-
If you work for job security, you will earn less and less the more and more you work. That is too high a price to pay for a little bit of security. Today, the best way to earn more and work less is via owning your own business. It continues to be the best loophole in the world. One reason to start your own business is the difference in when you pay your taxes.
Employee and business owner both earns money but income of employee taxed first (TDS) and then he spend what is left, while for business owner, he get chance to spend earned money first before paying tax.
The tax laws are really worst for the employee.
Working for Good money can make you rich:-
You can work for good money by simply starting a small home-based business, buying a franchise, or joining a network marketing company, you are moving into more tax-advantaged income. You can be rich if you build, buy, or create assets that create positive cash flow.
Try exploring potential of your free time and you can be rich.
Many of the very rich became rich in their spare time. So, if you have a job because you have financial responsibilities, keep your job but make better use of your spare time. When your friends go to play golf or go fishing or watch sports on TV, you can be starting your part-time business.
Do share your comments on this post.
Lalit
Superb article Raviraj. I liked the idea of generating passive income which is tax efficient and which lets the money work harder for us, instead of us working like a donkey for compnay