Holding down a steady job and earning regular paychecks is both the easiest and most common form of earning an income. Building a solid foundation of deep wealth however, requires time, planning and a considerable amount of research. There are three general means to creating wealth: active income, portfolio income, and passive income.
Photo by Linus Bohman via Flickr
While these three concepts of wealth building are reasonably easy to understand and initiate, hordes of people continue to muddle through work days feeling trapped in their current job. Discovering other enjoyable ways of earning money is the simple key to financial success and happiness.
Almost everyone is interested in looking for ways to make some extra income, and almost everyone can utilize at least two of the following wealth building methods.
ACTIVE INCOME: Actively Working for Every Dollar.
The premise of being paid for the work a person completes that provides the worker with little to no control over the payment amount is a prime example of active income. Some companies do provide production bonuses or profit sharing as employment benefits, but the position is still considered a source of active income. Some jobs are dead ends, but that doesn’t mean the employee is really stuck — there are always ways to get a promotion or another job.
While most jobs still require regular daily attendance at the company’s specific location, many people are beginning to take advantage of technological advances to become freelancers. Freelancing provides a number of benefits over a traditional job.
The ability to work from home is a valuable commodity in a society that is continuing to emphasize family time and quality of life over years of sacrifice and commitment to a single company. Taking control over work schedules and work location coupled with the ability to be personally available to care for children or aging family members are some of the top reasons more people are seeking freelance jobs.
An attractive alternative to creating active income through employment is to become the employer. Achieved through entrepreneurship, it consists of creating and managing a company that offers a unique product or service. Though it requires significant risks of capital, it also offers the possibility of tremendous rewards. If you do this correctly, it’s certainly the most powerful wealth building strategy you can possibly achieve — owners/employers typically take the lion’s share of a company’s income as their own.
PORTFOLIO INCOME: Managing Money to Make Money.
With the exception of entrepreneurship, active income is seldom the path to significant wealth building. However, using active income to fund the creation of portfolio income can be. A balanced portfolio often includes a broad selection of investment options that can be obtained using accumulated active income. These investments can be gold mutual funds, high-interest savings accounts, index EFTs, gold and silver bullion, flipping real estate and many others.
Speculation can also be part of portfolio income though relatively few people understand that there is a difference between investing and speculation. While there is a certain amount of risk associated with both activities, investing is a process involving research into many different companies within a specific sector and having balance sheets and profit and loss statements documented by the companies to support the investment.
Speculation often involves a heavy dose of emotion. Excitement generated within the investing community can lead potential investors to conduct little to no research and instead rely on a “good tip” from a financial insider. Speculation often relies heavily on past performance and a good deal of hope and luck.
PASSIVE INCOME: Make Money Automatically.
Of the three means of creating wealth, passive income is the preferred method as it involves little to no work beyond initial implementation. Owning rental properties where the owner is not responsible for the maintenance, dividend investing, multi-level marketing and outsourced businesses are the most common types of passive income.
To learn more about building a passive income, check out these ways to earn a passive income.
- Rental Properties. Renovating rental homes purchased below market value is one way to leverage capital. After obtaining a low interest home loan, the amount of money collected from renters each month creates passive income that pays the loan and interest amounts. This allows the property owner to pay off the mortgage without using additional capital.
- Dividend Investing. Research can yield a list of companies that pay consistently high dividends to their shareholders. Rather than receiving the dividends as income, investors looking to increase the passive income stream simply reinvest the dividends by purchasing additional shares of the company’s stock. Many companies offer low transaction fees for this service and investors benefit from the deferred taxes. Dividend stock investing is the easiest way to get into passive income with the least amount of up-front spending.
- Multi-level Marketing. Often touted as guaranteed, get-rich-quick business opportunities that require fast action, multi-level marketing plans have a tendency to be fraudulent schemes or gimmicks. Researching various marketing programs may yield a few low-yield opportunities, but valuable research time is almost always better spent on other reliable options for creating wealth.
- Outsourced Businesses. This is the top model of creating passive income. It involves creating one or more businesses that utilize outsourcing the majority of work to employees, contractors or agencies. The cost of outsourcing is far outweighed by the passive revenue created and the opportunities are limitless.
Maintaining a traditional job or expanding into freelancing is an excellent way to pay for daily expenses and accumulate seed money to begin accumulating true wealth using portfolio and alternative income streams. Having the skills and information required to create all three types of income simultaneously is critical to maintaining a steady income while building a strong financial foundation.
Shaun Connell is a full-time personal finance blogger and student living in rural Arkansas. He runs several blogs on investing and finance, including a daily blog on gold, and a weekly blog on wealth management. Shaun firmly believes in dividend investing, debt-free living, and long-term financial planning.
One small quibble:
“Rather than receiving the dividends as income and paying tax on the gains, investors looking to create passive income simply reinvest the dividends by purchasing additional shares of the company’s stock.”
You owe income tax on dividends regardless of whether or not you reinvest your earnings (unless you’re investing in a tax-advantaged account, of course).
I’m still not 100% convinced having rental property is passive income. You still need to buy the property, maintain it and spent time finding renters, doing repairs, etc. Not sure what is passive about any of that.
Oops, thanks, Kyle! I probably should have had another cup of coffee before writing that. 😉 Jenna, in a few days, I’ll be publishing an article on rental properties, and it will have a section on outsourcing the work to a property management company. That said, I think whether or not it’s a “pure” passive income misses the point — it’s a heck of a lot less hassle than almost every other business and income model. And I don’t think fixing repairs occasionally (assuming this isn’t outsourced as well) disqualifies it as passive — even the best dividend stock investing… Read more »
@Shaun – Thanks! Can’t wait to read your future post.
With the returns from almost all debt avenues at an all time low, and the current highs of the equity markets, I think that real estate investing is the best avenue currently. Given that a lot of properties are still under water and the prices are also close to historical lows, it makes it an even better option.
Thanks Shaun for the article.
I really agree, Saurabh — especially since we might be looking at another dive for the stock market in the US. I know George Soros has minimized his US stock investments, and he’s one of the few financiers I trust when it comes to asset allocation.
Thanks for the comment, Saurabh!
Real estate is also a good hedge against the possibility of dollar collapse. In that case most people holding cash and CDs will get wiped out. Only those holding hard assets will survive. And real estate is the biggest and most useful hard asset.
Very informative post. Achieving accomplishment of both financial benefits and emotional happiness are the most aspiration of business entrepreneurs. Having to attain this vision requires a lot of hardwork. Through this simple methods, reaching success comes in just easy management skill. Thanks for mentioning this important aspects.
I am also looking forward to reading more about rental properties! I’ve been thinking about buying something small for a while now, but I find it’s hard to find good information about this.