The Three Incomes
In the world of accounting, there are three different types of income:
1. Ordinary earned
2. Portfolio
3. Passive
When my poor dad said to me, “Go to school, get good grades, and find a safe secure job,”
he was recommending I work for earned income. When my rich dad said, “The rich don’t
work for money. They have their money work for them,” he was talking about passive
income and portfolio income. Passive income, in most cases, is income derived from real
estate investments. Portfolio income is income derived from paper assets such as stocks and
bonds. Portfolio income is the income that makes Bill Gates the richest man in the world, not
earned income.
Rich dad used to say, “The key to becoming wealthy is the ability to convert earned income
into passive income or portfolio income as quickly as possible.” He would say, “Taxes are
highest on earned income. The least-taxed income is passive income. That is another reason
why you want your money working hard for you. The government taxes the income you work
hard for more than the income your money works hard for.”
In my second book,
Rich Dad’s CASHFLOW Quadrant®,
I explain the four different types
of people who make up the world of business. They are E (Employee), S (Self-employed), B
(Business Owner), and I (Investor). Most people go to school to learn to be an E or an S.
The
CASHFLOW Quadrant
is written about the core differences of these four types and how
people can change their quadrant. In fact, most of our products are created for people in the
B and I quadrants.
In
Rich Dad’s Guide to Investing,
book number three in the Rich Dad series, I go into more
detail on the importance of converting earned income into passive and portfolio income.
Rich dad used to say, “All a real investor does is convert earned income into passive and
portfolio income. If you know what you’re doing, investing is not risky. It’s just common
sense.”
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