A model made famous by Robert Kiyosaki suggests that there are four basic income types. Let’s take a closer look at these four and the types of people suited to them.
The first type, and by far the largest, is employment income. Most people are directed from early in life to prepare to become employees, trading their time for money. It is the most stable and conservative income stream and requires the least financial knowledge. It is income you can count on (until you lose your job). It has always been assumed that better education leads to better jobs and greater income. That may have once been true, not so much anymore.
It’s the income stream that the government assumes in its various programs, that almost all financial advice is based on, and the one that provides most of the taxable income to the various levels of government.
The second type is self-employed income. This income type is the dream of many who crave freedom from the scheduled work week and independence from bosses. It is the type of income earned by professionals, by salespersons and, to a large degree, micro-enterprises engaged in retailing, construction and the service industry. While it allows the freedom from outside control, it usually increases the amount of time spent to earn income and the stresses associated with work. What’s more, despite write-offs for business expenses, it is just as highly taxed as employment income.
For many a dreamer, self-employed income is also a step to the next type, business income, and is often confused with that.
Business income is that which comes from larger businesses that are run by systems and the employees who manage and operate those systems. The income to the owners is barely related to the time spent in managing the business. Highly educated financially, the income to these owners is more dependent on the decisions made, and the efficiency of the systems and the employees they hire.
Our economy could not run without larger scale businesses. It is these that create jobs for employees. Because of this, business income is subject to much lower taxes than employment income, a necessary incentive to create the jobs that most of the population, needing the safety of a secure income and the convenience of not being highly educated financially, and supplying most of the tax revenue, will work at as employees.
The fourth type of income is investment income. Throughout one’s life cycle, most will also become investors of one type or another. A few will be primarily investors. This is the lowest taxed income type.
There are many kinds of investment income. For those with the least financial knowledge, financial planners provide a convenient service, though their investment products are extremely limited, such as mutual funds and money market accounts. The more knowledgeable may manage their own investments, usually for much greater returns because they have a much broader range of investment opportunities, including real estate, commodities and businesses, and because they do not need to pay someone else’s (self-employed) income to manage their money for them.
It is not surprising then, that the most financially educated are able to make the most money and pay the lowest taxes. Perhaps that’s as it should be. Otherwise, there wouldn’t be jobs for the less financially educated and those who simply want the security of employment income.
For those most adverse to risk and wanting to leave their work behind at the end of their shift, perhaps employment income is the best option. They will simply not be rewarded tax-wise for this choice. For those who need greater freedom and are willing to make their work a bigger part of their life, they might need to become self-employed.
For those able to take bigger risks, with bigger dollars, because of greater financially sophistication, business and investment income strategies are the best fit.
This article is from the May issue of Action newsletter, published by Fraser Valley Rent 2 Own. To subscribe to the newsletter, please see the opportunity on the right.
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