First: Raising A Red Flag
For Employees and Self-employed individuals, this article may come as a big surprise. This group of people is used to earning money by trading time for it.
When introduced to the concepts of leverage, residual income, and the like, many of them are so closed-minded that they automatically equate such concepts as a scam. And when they meet an ordinary guy (especially young and under-schooled) earning income that can only be describe as extra-ordinary, the guy is downright branded as a scammer.
What a wrong headed thinking!
Raising The White Flag Of Financial Education
I’m not sure if Robert Kiyosaki was the first to expose it, but his book entitled CashFlow Quadrant is instrumental to my understanding that there are basically four quadrants or ways of earning money each of which is represented by groups of people this way:
- E – Employee: earns from his job
- S – Self-Employed : earns by practicing a profession; may also work on his own business
- B – Business : earns by owning and running a business system
- I – Investors : earns by using money to make money
If you have not read the book yet, I recommend that you grab yourself a copy. Your local bookstores usually have it on the shelf, but of course you can always get one from Amazon.
Three Types Of Income
Linear Income – This is the type of income that is directly proportional to the amount of time you put into your work. Here are some examples:
- You work 8 hours, you are paid 8 hours
- More clients and projects, more money
- A 5-minute late for work means a deduction on your hourly salary… Blame it on the traffic… Grrr
- All sub-ordinates always earn lesser than the boss … ouch!
- Absent or in vacation means ZERO income
Leveraged Income – A business makes ample use of leverage by hiring people to work for the company or business and paying them for the time and talent spent to get things done.
Franchising (widely considered as scam a long time ago) is also a form of leverage. By inviting franchisees to run a business using a tried-and-tested set of methodologies, the franchisor is able to expand its brand and therefore makes it more valuable.
Leverage is making use of resources, talents, efforts of a team of people. Paul Getty, sums it best when he said, “I will rather earn from 1% of 100 people’s effort than from 100% of my own effort.“
Passive and Residual Income – This is the type of income that is worked out once and reaped several times over a long period of time. To generate this type of income requires creativity, talent and smarts. Here are some examples
- Royalties – artists, musicians and authors still earn even when they are long retired
- Rental Income – From commercial buildings and others
- Sales Override – Possible through affiliate marketing and network marketing (another one that’s deemed as a scam.)
- Investments – Essentially, the use of money to make money. Stocks, mutual fund, real estate, etc.
Which Type Of Income Is Best?
Notice that of the three types of income, it is only in the first type (Linear Income) that you are directly exchanging time for it.
Going back to Robert’s CashFlow Quadrant, Linear Income is generated by those in the E and S Quadrants. Leveraged Income and Passive Income are generated by people in the B and I Quadrants.
Take note also that anyone can be in any quadrant. It is even possible to belong to all of the Four Quadrants.
So, in other words, the answer to the question, “Which type of income is best?” depends entirely on you – your level of comfort, the talents you bring into the table, your own desires and your willingness to pay for those things.