I recently watched another video by the famous educator Robert Kiyosaki that tackles about the three types of income. We already know two types of income – the active income and the passive income. Active income is you working for money and passive income is your money working for you.
But active income can be further classified into two: Earned Income and Portfolio Income. So what are the differences? You can clearly see the difference when it comes to taxes.
Earned Income – Earned income is the income we get from our jobs. It is the fruit of our hard work and labor. When your parents tell you to study hard, get good grades, and get a safe and secure job – that’s earned income.
However, as Robert Kiyosaki said, earned income is the most expensive of all types of income because of taxes. In the US, earned income has a usual tax of 50%. Here in the Philippines, I think it’s around 30%. So who benefits more from your hard work and labor when you earn earned income? – The Government.
It will be nice if there will be big leap of our country towards progress and development but with the rampant graft and corruption in our country, we, as tax payers are on the loosing end.
Portfolio Income – Portfolio income is the income you get from your portfolio of investments. When somebody tell you that you should buy this house because the price may increase or you should buy this stock because the price may go up – that’s portfolio income. It’s also called capital gains.
However, as Robert Kiyosaki said, portfolio income is the second most expensive income in terms of taxes. In the US, portfolio income has a usual tax of 20%. Here in the Philippines, I think it’s 10% to 12%. So who benefits more from your hard work and labor when you earn portfolio income? – The Brokers.
Passive Income – Passive income is the income you get continuously on a regular basis. And as Robert Kiyosaki said, if you are smart enough, you can get as low as 0% tax for passive income legally.
Looking back at the cash flow quadrant, if you are an employee or self-employed, you are working primarily for earned income – the most expensive of all types of income.
However, if you are a business owner or investor, you are working primarily for portfolio income and passive income – both of which provide you with the most ‘net income’ because of less tax.
We must then develop the entrepreneur and investor inside of us. Most of us start with earned income but as we earn earned income, we must slowly divert from earned income to either portfolio income or much better passive income.