There are three VERY different kinds of income to be aware of…
1. Earned Income
This is money earned by trading time for money.
- For example: the paycheque that an employee earns from their employer.
- Taxed the highest
- Not leveraged at all. To make more money, this person must work more hours.
2. Portfolio Income
This is money earned in an investment, when the market goes up and creates Capital Gains.
- For example: I buy a stock and it goes up in price. Same thing with a house.
- Taxed the second-most
- Can be leveraged, especially if it’s real estate.
3. Passive Income
This is money that comes in over and over again, even though you only worked for it once.
- For example, I setup a Joint Venture that pays me $1000/mo every single month, over and over.
- If properly structured, is taxed the least.
- Massively leveraged, especially if it is setup with very little time or money, and with no risk.
Investing: Capital Gains vs. Cashflow
The vast majority of people out there are investing for Capital Gains. This includes anyone who has an RRSP or 401k, mutual funds, stocks, or is flipping real estate. All of these people are hoping to buy low and sell high.
Unfortunately, many professional investors consider this kind of investing to be the same as Gambling… you don’t really know if the market will go up or down, what expenses might be lurking between buy and sell, and ultimately if you will make money or not.
The dumbest reason in the world to buy a stock is because it is going up.
- Warren Buffett
Not to say that pro investors don’t like Capital Gains… in fact, investors that are educated can make a good deal of money through Capital Gains.
Just trust the squiggly line
The problem is when a bank advisor or Financial Planner sells investments (Mutual Funds) that are Capital Gains deals, and makes them seem like they are safe – like they don’t require much financial education.
The advisor shows you a chart (called an “Andex chart”) that has an upward-trending squiggly line, and tells you that “over the long run” the market has always gone up. I’m sure that was consolation to the people that lost half their wealth last year.
The reality is that all Capital Gains deals require education – including Mutual Funds.
Yet the advisor creates a false sense of security – or else makes you feel silly for asking questions – and before you know it, you are checking the box that says: “I understand that I could lose everything in this investment. Also, I declare that I have the required financial knowledge to be investing in this kind of security.”
NO I DON’T!!! Having personally been in this situation, I must say that it is a very uncomfortable experience.
Still addicted?
If you are 110% DETERMINED to invest in vehicles that are Capital Gains-only – whether that’s stocks, Mutuals, Houses, or otherwise – please get yourself educated. And make sure your teacher is someone more than a salesperson from the bank.
I encourage you to read Conspiracy of the Rich by Robert Kiyosaki. Be sure to pay close attention to the lessons about the difference between price and value, and how the Dow Jones and Real Estate markets are faring compared to commodities, especially Gold & Silver.
Why you want Cashflowing Assets
Cashflow deals on the other hand, continue to pay you regardless of if the market value is going up or down. Every month (or quarter) you are getting a cheque in the mail, regardless of how the asset or investment is doing on the market.
YES, it’s possible that the economy might make some of the cheques smaller, however it’s rare for the cheques to stop… if you are working with the right people, the cheques are typically rolling in every single month and right on time.
I know this because I personally continue to receive cheques of the same size, at the same time of every month, regardless of the economy, stock market, or political climate.
Hire some dollars & put ‘em to work
Instead of *hoping* to make Capital Gains sometime “over the long run”, why not make your cash work for you NOW? …grow more cashflow – money that you get to have TODAY – money that you can then use to re-invest elsewhere to create even more cashflow.
Examples of Cashflowing deals and investments include: Joint Ventures, Cashflowing Real Estate (careful: not all of it is), Dividends from Stocks.
Today’s reality is that “savers are losers”, “cash is trash”, and people who park their money in Retirement Plans (RRSPs & 401ks) or banks might be very disappointed… just think of the Billions that vanished in 2007.
Again, Conspiracy of the Rich by Robert Kiyosaki has an interesting discussion on this.
Protect your money from vanishing
When the market corrected (i.e. was destroyed) in 2007, thousands of Capital Gains investors had their life’s investments vanish in the blink of an eye. Conversely, those that had Cashflow investments, businesses, and assets simply continued collecting cheques.
While the 2007 market crash was very dramatic, there is an ever more dangerous, more devastating “silent tax” that might eat up your investment just as badly *without you even knowing it*. And that is called INFLATION.
Bailout Bucks
With Obama printing Trillions of Dollars, you and I’s money has already been diluted… and we’ll feel it once those “bailout bucks” make their way into the regular money supply.
If you’ve got uneducated money invested in a capital gain deal (Mutual Fund), or even worse – sitting in a bank account – then there’s a very real chance that your money is becoming more and more worthless with every passing day.
Worse than AIG, GM, & Freddie Mac
And what about those massive Boondoggles known as Medicare and Social Security? The United States has promised billions and billions of dollars to these programs, yet has NO WAY TO PAY for them.
In fact, some experts are *convinced* that these two programs will be so financially devastating that they could make the AIG / General Motors / subprime mortgage situation – a Trillion Dollar Problem – seem small. Hmm.
What to do?
Well, instead of sitting at home powerless and afraid of these looming financial monsters, what if you could turn the tables and take charge?
What if you had the skills to take what you already have, and multiply it? Take one paycheque per month, and turn it into 2 paycheques per month? Then 3? Then 5?
If this sounds appealing, then I invite you to read on and learn more about Cashflowing deals, businesses, assets & opportunities…
Your job as an investor
In his book Rich Dad’s Guide to Investing, Robert Kiyosaki talks about how the primary role of the investor is to convert earned income from their job into cashflow from an income-producing asset. THAT is the responsibility of an investor.
Cashflow from Investments
Recently a friend of mine contacted me about following this exact path. He wanted to take his one paycheque per month and place funds with an investment that gave him a second paycheque.
After exploring a few options, he found something that really fit for him. A little exploration and some good conversation with the right people and Bingo – a cashflowing, Passive Income producing asset for my friend.
This is a great example of leveraging one-time Earned Income into repetitive, ongoing, residual Passive Income through an investment vehicle.
Cashflow from Building a Business
In another instance, some friends of mine had a very interesting idea. This husband and wife duo both have regular day jobs that pay them Earned Income. Wanting to create real financial freedom, they had also started a part-time Passive Income business that they work in the evenings and weekends.
Not long ago, these people simply worked their day jobs and that was it. But then they started raising their financial IQ. They learned about things like the 3 kinds of income (see above), and they started questioning the “conventional wisdom” of investing: get good grades, get a good job, then invest in a well-diversified portfolio of Mutual Funds.
Because they are intelligent people, they decided not to risk their (or their daughter’s) future… they took matters into their own hands, and became committed to financial freedom.
Their Gameplan: To speed up their business growth, they took Earned Income from their dayjobs, then they invested in sponsoring an event I was putting on. Through this they gained new clients that are paying them a regular, residual, Passive Income. Very nifty indeed!
This is a great example of taking one-time Earned Income and leveraging it into on-going, repetitive, residual Passive Income. They simply opened a business and promoted it with Earned Income, so that they could acquire clients that paid them Passive, Residual Income. Brilliant!
And in the process of taking this specific path, they have risked very little, have no concerns about capital losses, and their Passive Income is well-insulated from market fluctuations.
Aditionally, because of the path they took, they have little to no management concerns. It’s all just cashflow for them now!
If you’re curious about either of these paths, simply email me here: Tim@TimothyFrancis.com
Find your OWN Cashflow
For ideas additional ideas on how you can add more cashflowing assets, businesses, investments to your portfolio so that you can increase your income & cashflow, please write me here: Tim@TimothyFrancis.com
Onwards and Upwards,
TF
