Going to Work Won’t Make You Rich, but Doing This Will…

“If you want to get rich,” said rich dad, “don’t ask for a raise. Instead of asking for a raise, begin to ask how you can serve more people. In fact, if you are serious about becoming rich, you don’t really want a raise. If you get a raise, you are working for the wrong kind of money.”

By now, you know that I got rich using debt instead of doing what most people do which is trying to get out of debt.

There’s also the problem of income. There’s good income and bad income. Most people don’t get rich, and that’s because they work their 9-5 for their whole lives and earn the wrong kind of income. Thinking that your income will get you wealth is officially outdated.

As a recent NYT article stated, “Ten years after the financial crisis, getting ahead by going to work every day seems quaint, akin to using the phone book to find a number or renting a video at Blockbuster.”

If you want to retire—and retire rich—you have to work for good income.

Not all income is created equal. The three types of income are:

  •     Ordinary income
  •     Portfolio income
  •     Passive income

The Rich Don’t Work for Ordinary Income

To my rich dad, the worst kind of income was ordinary income. He often said, “The worst advice you can give your child is to go to school in order to get a high-paying job.” He was against teaching children to spend their lives working for ordinary income. When he said this, it was clear he thought differently than my poor dad. It’s what he and his whole family believed in.

Ordinary income is the worst kind because:

  1. It’s taxed at higher rate than the other two types of income.
  2. It takes your time, your valuable time. Time you could be spending with your family, or vacationing, or doing what you’re passionate about.
  3. There’s very little leverage. To earn more, you just have to work harder.
  4. There’s no residual income for your work. You get up, go to work, go to bed and do it all over again.

My rich dad also called ordinary income, “50-percent money” because no matter how much you earn, the government always takes at least 50%—one way or another.

From rich dad’s point of view, it was not very smart to work hard and have the government take at least 50 percent of what you work hard for. (A few years back, the tax rate was even higher than 50 percent. While the rate has come down over the last few years, many of the tax loopholes have been taken away in order to compensate for the lowering of tax rates.

It’s All About Passive Income

Passive income had the greatest benefits to rich dad. He had to work the least for it, it’s often taxed at the lowest rate, and it consistently earned more over a long period of time.

When I made the plan to retire, I had to know which type of income to work for. Kim and I were able to retire young because our plan had us working hard for passive income not ordinary income.

One of the reasons Kim and I retired early was because we utilized tax-deferred money and many times what my rich dad called “0-percent money.” Tax-deferred money is money from capital gains that is not immediately taxed and is deferred for as long as we choose to defer paying those taxes.

So you need to create passive income…

… And Portfolio Income

If you want to retire, you will need both passive and portfolio income—in most cases.

Portfolio income is, in most cases, earned from paper assets like stocks, bonds, and mutual funds—a 401(k) is an example.

One flaw with 401(k) money is that, although you save your money in it and it hopefully grows free of the 20 -percent capital-gains tax when you withdraw it at retirement time, you are taxed at the 50-percent tax rate of ordinary income. Even though you believe you are investing in portfolio or 20-percent money, when you cash it in, you are still taxed at the ordinary income rate of 50 percent.

The second flaw is that if your income remains high after you retire, you continue to pay higher taxes on your retirement money because your income went up, not down.

I’m not saying one is better than the other. In fact, your level of financial education should dictate what you do. Just remember, one is if you want to be safe and secure, one to be comfortable, and one to be rich, remember that there are different investment vehicles for each type of plan. 401(k) plans and savings are parts of a plan to be safe, secure, and comfortable. They are not part of my plan to be rich.

Are You Among those Paying the Most Taxes?

The hottest topic during one mainstream media cycle was Trump and his taxes. He claimed to have paid $0 in taxes, just as I have. The only way in which he would not pay taxes would be by doing things like investing and creating jobs to receive tax benefits created by the government!

As you probably know, the tax codes in the US and in many different countries are long and complicated. The question is, why?

The reason is that government leaders learned a long time ago that the tax codes could be used to make people and businesses do what they want by utilizing the tax code.

In short, the many credits and breaks that are found in the tax code are there precisely because the government wants you to take advantage of them. For instance, the government wants cheap housing. Because of this, there are many tax credits for affordable housing that developers and investors can take advantage of that minimize their tax liability, put more money in their pocket, and in turn, create affordable housing. Everyone wins.

At the end of the day, there are two groups who pay the least in taxes: the poor and the ultra-rich. If you don’t want to pay taxes, but you’re also not interested in being an entrepreneur or an investor, then your only choice is to become poor.

But if you want to be fiscally free and pay little-to-nothing in taxes, you’ll need to choose the path of the ultra-rich. Speaking as one who has walked that path, it is one of the most rewarding journeys you can take. Because at the end of the day, it’s not about how much money you make, but how much money you keep.

Regards,

Robert Kiyosaki

The Daily Reckoning