Rich Habits Podcast – 25: Demystifying the 3 Types of Income

Intro

In this episode of the Rich Habits podcast, the hosts delve into the three types of income and emphasize the importance of diversifying income streams. They provide valuable insights on earning income, passive income, and portfolio income, and offer practical tips on building wealth and achieving financial freedom.

Main Takeaways

Earned Income: The Foundation for Wealth Building

• Dialing in your earned income and establishing a solid base is the first step towards building wealth.
• Stability is key, and having earned income from a W2 job or a small business is acceptable while building other income streams.
• Earned income is where everyone starts, and it can vary based on the effort put into it.
• Planning ahead and working towards multiple sources of income is crucial for financial freedom.
• Don’t rely solely on a 401k for financial freedom; it’s not an investment strategy.

Passive Income: Achievable and Essential

• Passive income requires minimal effort to obtain and can come from sources like rental properties or equity ownership in a business.
• Many people already earn passive income without realizing it, such as through savings account interest or credit card cash back rewards.
• Passive income strategies are essential to avoid working until retirement.
• Consider SPY IETF, which offers a 12% annual distribution yield, as an excellent passive income strategy.
• NEOS Investments provides ETFs for generating monthly passive income with diversified exposure across equities, fixed income, and cash alternatives.

Portfolio Income: Building Real Wealth

• Portfolio income, derived from investments like stocks, real estate, or farmland, is where significant wealth can be built.
• Portfolio income compounds over time, making it an excellent long-term wealth-building strategy.
• Tax rates for portfolio income are typically lower than those for earned and passive income.
• Understanding the difference between long-term and short-term capital gains can help optimize tax liabilities.
• Rental income is a form of ordinary income, but the tax rate depends on the type of real estate project and level of activity.

Summary

Earned Income: The Foundation for Wealth Building

Earned income serves as the starting point for building wealth. It is important to establish stability through a W2 job or a small business while working towards additional income streams. Relying solely on a 401k is not a sufficient investment strategy for financial freedom. Planning ahead and diversifying income sources are key to achieving long-term financial goals.

Passive Income: Achievable and Essential

Passive income, which requires minimal effort to obtain, can be derived from various sources such as rental properties or equity ownership. Many individuals already earn passive income unknowingly through savings accounts or credit card rewards. Implementing passive income strategies is crucial to avoid being dependent on active work for income. Consider investment options like SPY IETF or NEOS Investments for generating passive income.

Portfolio Income: Building Real Wealth

Portfolio income, generated from investments like stocks, real estate, or farmland, offers the potential for significant wealth accumulation. It compounds over time, making it an effective long-term strategy. Portfolio income is often taxed at a lower rate compared to earned and passive income. Understanding the tax implications of different investment types, such as long-term and short-term capital gains, can optimize tax liabilities. Rental income is another avenue for portfolio income, with tax rates varying based on the nature of the real estate project and level of activity.

Conclusion

Diversifying income streams and understanding the three types of income—earned, passive, and portfolio—are essential for building wealth and achieving financial freedom. By establishing a strong foundation through earned income, exploring passive income opportunities, and investing in portfolio income-generating assets, individuals can work towards long-term financial security. Don’t wait to take action; start building multiple income streams today.