Chapter Seven - From One Income To Another

Let us take a look at the different types of income. They are:

1. Earned Income - obtained from working for someone or a company.
2. Passive Income - income generated from business.
3. Portfolio Income - income generated from investments in paper assets.

Earned Income comes from having a job in a company or in someone else’s business. You get paid for your time and services rendered. In the previous section, we mentioned that workers work just hard enough not to get fired and employers pay just enough for workers not to quit. This indicates that the income an employee can generate from working for an employer is limited. There is the possibility that an employee may devote extra effort thinking the employer will pay him/her more. It is a rare possibility particularly when business is difficult, but possible. And even if it happens, it is still limited. Whatever additional profit gained by the employer as a result of the employee’s extra effort, the employer will get the bigger “slice of the pie.” You are, in effect, making someone else rich through your added effort. Don’t think I’m discouraging this. It is a good act. I’m just stating a fact. It’s likely that you will be telling yourself mentally: “Hey, that’s not fair.” Fair or not, that’s the way life is, when you work for money.

If you are an employee, you get your money or pay cheque after everything else. It is earned income, less taxes and everything else deductible, before money reaches your hand. And if ever the money reaches your hand, the next place it is bound to go is to pay your bills. If the amount is not enough, you are bound to borrow, which makes you debt-ridden if it accumulates. Now, this is one big mistake. Don’t ever get debt-ridden. It is the quicksand to poverty.
Earned Income is a safe way to generate an income. There is not much thinking to do. Except for a few high paying, high profile jobs, your work is mostly concentrated on a few things where you keep repeating the same functions. Unconsciously, this discourages creativity, so boredom starts to set in.
It is because of this boredom that getting to work every morning is such a drag and you keep on looking forward to weekends, holidays, and vacations.

Unless you really love what you do without consideration to the income it generates, or unless you are highly paid, or unless there is a lot more to learn in your job, or unless financial security is of no importance to you, there is no reason for you to stay long in the “rat race.” The earlier it is to get out of the trap, the better chances you will attain financial success.

Passive Income is generated from businesses. You can sell products or offer services, or a combination thereof. Examples are buying/selling real estate, trading merchandise as in wholesaling and retailing, etc. In many cases, you need not be physically present in your place of business. There are also small businesses like vending machines where you hardly require an employee to visit those machines for refill (since you can do it yourself). You can also go with franchising; either be a franchiser or a franchisee. The list is endless as long as you do what you love to do.
The beauty of going into your own business is that you work for you, not for someone else. You enrich yourself, not someone else. Your time is disciplined but more flexible because you can make your own schedule.
Another advantage of going into business, especially in your own corporation, is that you earn and spend before tax is deducted, unlike being an employee where you are taxed before you spend.

Portfolio Income, just like passive income, is making money work for you. Portfolio Income is generated from paper assets like bonds, stock market, certificate of deposits, and mutual funds. They are called paper assets because literally, they are businesses that revolve on papers.
It is in portfolio income where financial knowledge is of vital importance. Your intellect interacting with creativity can either unmake or make you rich.

Time for Action

Now that you know the different types of income, it’s time to take some action!
Receiving earned income is fine, but your primary aim should be to get passive and portfolio income as much as possible. Utilize earned income to its fullest until you finally reach your goal of earning only passive and portfolio income.

The preparatory steps to take would include:

First, you must save. You must earnestly establish your asset through savings, whether the money comes from earned, passive, or portfolio income. If you haven’t done so, better start now because time is essential in building assets. You must discipline yourself to set aside a fixed amount. For example, if you promise yourself to set $500 each month as savings, you must consider this amount to be the least you will save. If it goes above this amount, the better it is. If you have more bills to pay, do not pay them from your savings. Your principle should be to pay yourself first, not last. Get your money to pay your bills elsewhere (by finding ways to do extra work or by thinking creatively on how you can generate extra income). Your savings are not meant to pay bills, they are meant for future investments to get you out of the “rat race.” I am not suggesting that you throw yourself to a pitiful state. You can still enjoy life because that’s what life is meant to be, but be prudent in spending. Keep your expenses to necessities only (at least for the time being until you’ve attained financial freedom).
Next, you must plan. While still on the “rat race,” you must prepare plans of what you want to get involved in once you’ve achieved financial success.
Third, visualize. Try to imagine or visualize in your mind the possibilities of your prospective business. This will give you a prelude of what to expect and what else to prepare in case there are things that you missed to prepare.
Fourth, categorize. The time span for the transition period depends on many factors like the type of business, the value of your asset if money plays a major part of your intended business, and the availability of the people that may be involved in your plans.
Lastly, do some research. Know more about the business you will get into. Talk to specialists or people you know who are more knowledgeable in your intended business. If you avail of their services, be generous to them money-wise and they will reciprocate your generosity with helpful information. Buy books and tapes, attend seminars which will be helpful to increase your financial knowledge. Yes, I need to repeat that advice again because increasing one’s knowledge is really important and priceless. This will save you time, effort, and money in the long term. It also injects quality to your product, service, or business.
Your financial ability combined with the urge or the will to be financially secure can drive you to gain wealth. Just like an obstacle course, there will be drawbacks. Your determination will determine what will go to your pocket.

A person with financially developed abilities can see opportunities far beyond what his/her eyes can detect. Creativity revolves around the mind that is trained financially to make money. It takes time and technical skill to reach this level. Patiently keep developing this skill.
It might be difficult for an earned income person in the “rat race” to move to the “wealth express.” One way to motivate such person is to force him/her to set aside a fixed amount for savings no matter what. Again, creativity plays a vital role. Either he/she reduce his/her expenses, or find another source of income, or both. He/she should persevere in developing his/her financial knowledge.

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