Thursday, July 15, 2010

Rich Dad Lesson: 3 Types of Income

Like I promised here is another lesson from the book Rich Dad Poor Dad by Robert Kiyosaki. Robert explains that he is often approached by reporters for interviews, where he is asked what he does for a living and how much he gets paid. He usually tells the reporter that he makes a small salary from working at his company (compared with Fortune 500 CEO's), and that's usually where the interview ends. What most reporters fail to ask Robert is if he has other sources of income. Robert is rarely asked what kind of business he is in, what investments he has made and if he has other sources of income.

In Kiyosaki's book he explains that there are three types of income. There is active income, passive income and portfolio income.
1) Active income comes from your full-time job where you work 9-5. Active income typically comes from exchanging your time for a salary or wage.
2)Passive income is the opposite of active income. This is where you receive cash flow without actively putting in long hours. Passive income comes from what Robert defines as an "asset" (see article ). In this case it can be something like owning rental property, where tennants pay you rent on a monthly basis.
3) Finally, there is portfolio income which comes in the form of stocks and bonds. When you own these types of investments you receive cash flow in the form of dividends, distributions and coupons.

Reporters often fail to ask what are Robert's passive income streams, they are only interested in his active income or how much he earns at the job he works. They fail to notice that he owns apartments, stocks, bonds and patents. He has published various books that he continues to receive royalties for. He owns patents on board games that he invented to help people learn about personal finances. These patents provide Robert with a constant flow of cash.

We learn from a young age that we should go to school, get good grades, so that we can get a high paying job. We are told to strive to become doctors or lawyers. Doctors and lawyers make a great salary, however they have to put in their time and expertise to earn their salary. These professionals are limited in their earnings by the amount of hours they can work in a day. So, it's important to understand the other forms of income, such as passive and portfolio income if your goal is financial freedom!


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