Why You Should Start Thinking About HOW You Earn Money (Not Just How Much You Earn)
Last weekend, I was blessed to be one of the facilitators of an SIA (Strategic Investor Alliance) Wealth Building Mastermind meeting in Philadelphia. During a full day of purposeful planning, one of the concepts that we talked about was, “Where does your income come from, and why is that important?”
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One thing that I discovered is that the type of money earned may start to dictate what type of investor you are and how you approach risk. For example, if you’re a high income earner, you may have less time available to commit to investing, and you may opt for more passive income with more security.
So, How Do You Earn Your Money?
For most of us, we earn money by being an employee. Don’t get me wrong; it’s great to have a job, and many of us love our jobs, but at the end of the day we’re trading time for money. But that’s only part of it. The real bad news is that earned income, the kind you make at a job, is taxed the highest.
The next way folks earn money is by being self-employed. This seems better than being an employee because now you can control your schedule by being your own boss as an independent contractor, but in some ways you just own a job. Sure you’re still trading time for money, but you do have more opportunities to take some business deductions off of your earned income. The downside is that oftentimes, your business revolves around you, and it can be difficult to replace ourselves, especially the higher and more specialized the position is. Think of a professional athlete or an eye surgeon, as these types of positions can become tough to replace.
Then you have business owners, who start to earn their money off of the work of others, thus leveraging everyone. As J Paul Getty says, “I would rather earn 1% off the efforts of 100 people than 100% of my own efforts.” The good news is your income is not dependent on your presence. Many business owners also have the benefit of running the bulk of their expenses through the business as well.
Then, of course, you have investors, who make money by letting their money work for them (think dividend and interest income or positive cash flow from rental properties).
As Robert Kiyosaki says, “The main reason people struggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money but never learn to have money work for them.”
And then you have people like me who make their money in a combination of the ways mentioned above. Although I've made money in all of these ways, as an employee, a self-employed independent contractor, a business owner with many employees, and even as an investor, it wasn't until much later in my life that I realized the power of synergy between utilizing leverage, tax-saving strategies, and the compound effect of investing.
Tax implications can have a huge impact on your overall wealth creation. For example, if you asked me if I’d rather have a salary of $100,000 or $100,000 in positive rental income, the answers is easy. I’d rather have the hundred thousand dollars in rental income, as it is more favored in the tax-code (excluding FICA and unemployment tax). This can make a big difference over time.
The last thing one needs to consider is what type of income do you have right now, and what type of income do you want to have in retirement?
From a general perspective, it’s easy to say we want as much passive income as possible and that we want as much as possible to be tax-free.
For me, through purposeful planning, I look to increase my more favorable types of income, like passive and portfolio income, and decrease the higher taxed, employee and self-employed types of earned income. Right now, one of my goals is to have more passive and portfolio income in retirement than earned income now.
I’ve learned that it’s really not what you make but how much you keep that counts.
So, what are your goals for income in the future?
Let me know with a comment!