I suppose this subject won't
need any introduction. I’m sure everybody knows what an income is.
Even kids know when it is
time to get allowance from their parents. So we are going to skip any formal
definitions.
In my book, income means actual money coming in.
For this book's purposes,
gross income is irrelevant.
What we are interested in is
net income also known as take-home-pay. Here in Malaysia
Please note that tax
planning can make a difference to your take-home-pay but it is too complicated
to be covered in this book. So if you have a huge gross income, please hire a
proper tax consultant to maximise your return.
There are two types of income, active and passive.
In simple terms, active income is when you have
to work for the money.
Passive income on the other hand is when the
money work for you.
Salary, overtime, bonus are active income. Home business and
freelance work are also active income. No
Work No Pay.
Here are some examples of
passive income that I got from Wikipedia:
- Earnings from a business that does not require
direct involvement from the owner or merchant
- Rent from property
- Royalties from publishing a book or from
licensing a patent or other form of intellectual property, such as
computer software product
- Earnings from internet advertisements on
websites
- Dividend and interest income from owning
securities such as unit trusts, stocks and bonds
- Pensions
Even if you play with
penguins all year round, passive income
will still be credited to your account. No
Work Still Got Paid. How awesome is that!
Passive Income - Expenses
> 0 = Financial Freedom
Passive Income - Expenses < 0 = You Will Work Till You Die
(Active + Passive) Income - Expenses = 0 = You Are In Trouble
(Active + Passive) Income - Expenses < 0 = You Are In Double Trouble
(Active + Passive) Income - Expenses > 0 = There Is Hope That You May Not Work Till You Die
How so?
(Active + Passive) Income - Expenses > 0 = Surplus Cash = Investment = Passive Income
Over the years if you diligently invest your surplus cash, your passive income will grow and eventually surpass your active income.
Passive Income - Expenses < 0 = You Will Work Till You Die
(Active + Passive) Income - Expenses = 0 = You Are In Trouble
(Active + Passive) Income - Expenses < 0 = You Are In Double Trouble
(Active + Passive) Income - Expenses > 0 = There Is Hope That You May Not Work Till You Die
How so?
(Active + Passive) Income - Expenses > 0 = Surplus Cash = Investment = Passive Income
Over the years if you diligently invest your surplus cash, your passive income will grow and eventually surpass your active income.
When your passive income
exceeds your expenses, treat yourself to a nice holiday. You can now say
sayounara to your job!
Homework: List down your income. Refer to your asset list if need be. Identify whether they are active or passive. This is going to be part of your Cash Flow Planning which will be covered in Chapter 7.
Homework: List down your income. Refer to your asset list if need be. Identify whether they are active or passive. This is going to be part of your Cash Flow Planning which will be covered in Chapter 7.
As a general rule, when you started working active income will dominate your portfolio. Over the years if you manage your cash flow well, your passive income should take over.
How fast it should take
over, depends on how fast you wish to retire.