Creating Wealth – The Type Of Income You’re Making May Be Costing You The Most
Creating wealth today is more important than ever as we shift more and more away from the old industrial age era to the information age. While a high-paying job and the promise of good employer- or government-provided benefits was music to people’s ears in the previous era, today security lies in your ability to get financially educated so that you’re in control of your income and so that your assets are not gambled away by so-called financial brokers (ie, sales people) or eaten up by fees, taxes or inflation…
(For the previous post in this article series on creating wealth, follow this link: Is It Too Late For YOU For Creating Wealth?)
Asset Protection: Creating Wealth By Taking Control of How Your Income is Earned
The first step in creating wealth is getting in control but first you have to know where you’re at. You can break down the different types of income into four separate categories:
#1 – Earned Income
This first type of income is the income most people are familiar with, and that’s earned income from a job, working as an employee for example. A person who relies primarily on this type of income has very limited options available to them in regards to how much they earn and how they earn it, essentially giving up those options for perceived security (again, today this is more an old perception than realty).
A person trading their time for money as an employee also pays the highest percentage of taxes. In most cases, employees are 100% reliant on the income from their job and in many instances living paycheck to paycheck. If anything were to happen to their job or income from the job, it would be financially (and otherwise) devastating to them. This type of income does not lead to creating wealth.
#2 – Small Business/Sole Proprietor Income
The next type of income is income as a sole-proprietor or small business. This person also perceives they have safety or security of their income because they feel they control it. The fact of the matter however, is that their income controls them. They are the asset for the business and should anything happen to them, should they fail to produce results for the business, the business would fail. This person simply OWNS their job.
Small business owners/sole proprietors also pay some of the highest amount in taxes but are not really in control of their life (remember their business controls them)! Most usually work not only overtime but often double-time, virtually living their business to ensure everything is done just right. This is where the expression “chief, cook, and bottle-washer” comes from as the small business owner is more often than not a jack-of-all-trades, because they’re either not able to afford to outsource or hire out critical job functions or simply prefer not to (“nobody does it better than me”). This type of income also does not lead to creating wealth, unless the business owner changes in order to operate at the next type of income.
Examples of these types of earners would be tradesmen like a plumber or electrician, a doctor or dentist, a florist or baker, a “mom & pops” family-run restaurant, even a professional athlete or entertainer.
#3 – Big Business Income
The next classification of income is derived from an entirely different mindset. The next type of income is that of a big business, typically a business with 500 or more people.
The distinction between this income and the previous small business income is that income from this type of business can be passive to the owner, meaning the owner is not actively required to work in the business in order to maintain and/or increase the income for that business. The owner can be away from the business and the business can still grow without him or her (allowing the owner to be creating wealth). The asset is the business itself, not the owner of the business (as is the case for a small business or sole-proprietor).
Additionally, income from this type of “big” business – due to it’s passive nature – is taxed at some of the lowest rates and allows a business owner lots more flexibility and control over how they pay their taxes, ie, they could reinvest their profits even tax-free to boost returns for additional profits (which makes it even easier for creating wealth).
More millionaires have been created in the U.S. through this type of income than any other due to it’s many tax advantages and abilities to leverage and reinvest profits to expand and further grow the business and income.
- Examples of these type of businesses would be a plumbing company with branches around the country like RotoRooter; a doctor who runs a hospital that employs many other doctors and nurses; a bakery that bakes goods for distribution across the country; a restaurant chain like McDonalds with not just one store but locations around the globe; an owner of a professional sports team or entertainment company that puts on events around the country.
One of the core differences that determines whether a business will stay small or become a big business is the dependence on systems (as is the case of a big business) versus the dependence or reliance on a personality, as is the case for most small businesses (dependent on the owner to be there, to show up, solve day-to-day problems, to run the business, etc).
Creating Wealth – Some Startling Statistics
A high majority of people will fall into the first or second income category, which is why you can understand how at age 65, 95% of the population is either dead or dead broke with only 4% financially independent and only 1% wealthy.
But here’s the good news:
While your income today may only come from the 1st or 2nd income category as described above, that does NOT mean you are destined to become one of the 95% – there’s still hope for you for creating wealth!
Now that you understand where you’re at, you now have a choice moving forward as to which income group you’d like to belong to, a choice as to what financial future you’d like to have.
That may be possible for others, but not for you… or is it?
You may be thinking how that could be possible for YOU if you don’t already have a big business or the ability to borrow millions of dollars, or the skills, education & training neccesary to invest in or run a big business.
Well as mentioned previously, a big business is classified as having 500 people, but really the main distinguishing factor is again the reliance on systems, not the number of people in the business (and notice I didn’t say 500 people employed, either)…
The Most Important Yet Widely Mis-Understood Creating Wealth SECRET About Big Business Income
A big business can start out small with just the owner-operator (as all companies do). However, instead of an owner trying to do everything him or herself or trying to be everything for the business – by thinking bigger, by having the long-term and ultimate objective in mind and with the proper structure in place – a business can grow and expand and develop into a big business.
As a business based around systems grows (ie, the owner doesn’t have to be present for the business to run) it starts to throw off passive or residual income to the owner, creating wealth, allowing he or she take a step back to focus on growing the business even bigger (think duplication via streamlining of systems, ie, franchising, setting up chains, etc).
Or he or she could step away from it altogether and do something else – or just live life with the free time and money to now finally enjoy it, thanks to his or her systems-based business (ie, “big” business).
“Only one business model provides someone with the aspirations and desires of financial freedom the ability to start up their business WITHOUT having to mortgage their home or quit their full-time (or part-time job) to get it started…”
There are only a few business models available with such a structure (read my article on the 3 business building options for creating wealth for more detail), but only one tried and true business model provides someone with the aspirations and desires of financial freedom the ability to start up their business WITHOUT having to mortgage their home or quit their full-time (or part-time job) to get it started – especially helpful for those who don’t have tens and hundreds of thousands of dollars (even millions of dollars) on the side somewhere to invest into starting a business OR for those who do not want to have to give up their job income in the early days before their business starts to throw off enough income to live off (good idea!).
(Once you have established a good deal of wealth and liquid assets from a profitable “big” business, you can further leverage your business to fuel and feed your investment goals to multiply your wealth for the greatest returns from income of the 4th category as outlined in a future article on Creating Wealth through Investment Income)
The Bottom Line: The Most Advantageous Income Type for Creating Wealth
“Big”, or system-dependent, businesses provide their owners the ability to be able to consistently work smart and work hard for a reasonably short period of time (in some cases as few as a couple of years).
And, as their business expands and grows as the systems begin to take over, the owner finds him or herself working less and less in the business as they’re able to leverage more and more of their efforts using the system to create passive, residual income, freeing up the owner’s time to finally experience and live life according to his or her desires…
—–> To learn how you can plug into and get your own “big” business up and running – to build alongside whatever income activities you have now – visit the following page below now: Creating Wealth
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Creating Wealth – The Type Of Income You’re Making May Be Costing You The Most http://t.co/uA5yVhGQ
Creating Wealth – The Type Of Income You’re Making May Be Costing You The Most http://t.co/uA5DsRQ0
RT @HansSchoff: Creating Wealth – The Type Of Income You’re Making May Be Costing You The Most http://t.co/uA5DsRQ0
Creating Wealth – The Type Of Income You’re Making May Be Costing You The Most http://t.co/uA5DsRQ0
Great post, Hans! You are so right that you aren’t bound by one method or the other. For example, you can make your income from a job or your own business, but you can invest a portion of some of that money, and following the time-tested principles of Buffett and Graham, you can find great companies and let the money grow.
I stopped the rat race in 2008 and focused fully on professional blogging as well as WordPress Design and Development. I also got back into school, which I wanted to get things on paper that I did not even learn at school in the first place.
It is not easy at first for small biz owners. For web designers, the average time to become mainstream is 10 years, and that is if you are working overtime a lot. For me, I am getting to the point I can finally enjoy myself at conferences I speak at and not have to worry about getting a client’s site done. My next step is putting out my own WP framework and custom pre-made themes… the automation will help pull in more income.
Big corporations are not necessarily something to aim for, but in some niche, it might be ideal.
Hey Nile, a big business doesn’t necessarily need to be some large corporation, really it’s the size of the idea. Of course, the internet provides a lot of tools to help increase that amount of leverage but a “big business” is one that essentially is run by systems, where the day to day operations run on their own, without having to be involved in the process, being able to step away from it and still have your income grow. Won’t work in all business models, but that’s how to essentially become a big business (from this perspective anyway)
Having spent most of my life in the corporate sector, as a worker-bee – I can vouch for the limitations.I really impressed in your post!
Great post Hans! I remember reading a book by Robert Kiyosaki called Cash Flow Quadrant that spoke about these same issues. I know it’s never too late to change one’s success, but the first thing that needs change is people’s mindset!
Thank you for this great post!
Hey Eldridge, appreciate your comments. Kiyosaki is a great educator, learned a lot from his books, seminars, games, etc. It all starts with the mindset; without the mindset it’s nearly impossible to achieve.
It is a very nice and informative post.Thanks for sharing your great knowledge on creating wealth .I Did not know about that before .Now i should have to learn them all .
Thanks for stopping by Nicholas!
Hi Hans…Thanks for posting this topic because it can help a lot of people, if you know it…Cheers!!!
Especially today in the information age, financial knowledge is power! Thanks for stopping by James
You make it so easy to understand the different business models. Thanks for making it so clear.
I first learned about the different business models by playing the Cashflow game designed by Robert Kiyosaki. It really helps shift your mindset.
Hey Debbie, that is a great game which illustrates the different ways of making money. It can be frustrating for many people the first time they play because there is a lot of learning going on, but once they get it, that mindset shift is priceless!
Hi Hans I’m so glad I run my own business from home. It gives me the lifestyle that I’ve always wanted. To be a good wife and mother and earn an income. The opportunity to raise my own children has been priceless. Working for someone else would never have given me the opportunity to live the life I choose. I’m so glad I left employment and stepped out on my own.
Anne, thanks for stopping by and sharing your experiences. A home business has incredible benefits and advantages that just are not available to those earning earned income.
Dereck, it definitely is not an easy shift to go from employee to potential employer. The shift itself rather is pretty simple, but getting your head around it can be something else completely. Most of our culture and society is setup to despise the rich or the wealthy, we are supposed to think of them as greedy, careless, selfish beings (just look at who the villains always are in the movies – are poor or rich?). So there are many obstacles to changing this mindset; it requires a reprogramming, a relearning of what the truth really is. Money does not make anyone rich or poor – it has the power to do either. The real variable is the person. Financial education is what it takes to take some money and make it into more. Most people will turn it into less (think of lottery winners…). Thanks for the comment Dereck!
Thanks for the great business comparison. Home based businesses allows anyone to be a business owner. And reap the some of the tax benefits the big boys do.
I didn’t realize that the big businesses got such a great tax break.
Great article! I love how you break all the different types down in such a way that anyone can really understand it.
You know, it’s such a hard thing (the mindset) to adopt when you are an employee looking into the world of employer. But when you do, you cross into the world of “psychologically unemployable”.
Thanks for the great posting, another instant classic!
I think its a matter of personal choice to run a business or to be employed with a good salary. Personally I think its better to run a business than to be bound by what we call the ‘Golden Handcuffs’ of the corporate world where even our own ideas are sold off without our knowledge and where one cannot even think and express freely. However, by this I do not mean everyone experiences it, its just that I love more, to work independently and have some quality time besides earning money.
Greg, yes, it is a matter of personal preference. A salaried position is not bad, it’s just not what it used to be. Yet, as the world changes and as get further and further away from the industrial age, the education system and really society as a whole has not come to grips with the change. The 40/40/40 plan is no longer viable for the majority of people today. It is more the exception than the rule. That is not to say that you shouldn’t have a job; just don’t expect a job to be able to provide for you and your family for the rest of your life as a job once could. Today we must now take responsability for our lives, for our finances. Income from a job is great, as long as you have other plans for what you’ll do after that job. It’s all about financial education! Thanks for you post Greg!
This is truly a meaty and content-filled post. I love the prospect of residual income and passive income. Now, I’ve got to plug in all the pre-requisites to get the ball rolling.
Thanks for sharing.
Angela, thanks for the feedback! It all starts with the first step!
Awesome article! As an entrepreneur working on moving his business from the small business model to a larger system I think that you are absolutely correct. Even better in today’s economy, you do not have to have 500 employees to have residual income. That is the beauty of our society.
Andy, that is the key! Most people did not catch that. It’s not 500 employees that are needed to become a big business, but rather 500 (or so) people. Again, by thinking bigger and using the right business structure or system, one could duplicate themselves into hundreds of other INDEPENDENT CONTRACTORS, allowing you to leverage yourself without the hassle and headaches of employees, payroll, etc.
(my video on creating wealth details the differences and advantages some structures have over others)
Thanks for pointing that out Andy!
Goodness, first of all what shocking and sad statistics:-
“at age 65, 95% of the population is either dead or dead broke with only 4% financially independent and only 1% wealthy.”
I think from a very young age we are taught to follow, to do as we’re told, and certainly where I grew up, free thinking a big dreams where discouraged. I think this general mindset stops a lot of us from reaching for our dreams of financial freedom and we’re frightened in to perceived security.
I think that this blog gives out the right message and I’m very pleased to have come across it! It calls out to the growing number of people that are now disillusioned with the system and want to make a change…
All the best,
Hey Emma, I agree with you. I don’t believe we were sabotaged or destined to fail whether by what we were taught at home or at school it’s just that the system was designed for people to become good employees and good citizens, and is run and managed by the same kinds of people.
How could we be brought up otherwise? (Unless you were born wealthy or rich – those kids have an entirely different perspective and understanding and view of the world: think Donald and Ivanka Trump for example…)
How could people who do not know first hand what it takes to become financially free or rich lead or teach others how to do that very thing? If they knew how those numbers would be drastically different! Thanks for your comment Emma!
It is a very nice and informative post.Thanks for sharing your knowledge on creating wealth.You well explained the post.
I really hope to someday be in the third category. My hubby and I bust our buts and I know it will pay off eventually. I hated working for the “man” so to speak. Great post, as always you’re teaching me more and more. Thank you 🙂
Hey Lynda, getting into the 3rd category really is just a matter of mindset. Of course, you have to have the right structure to allow you to become a big business, but many small businesses remain small because the owner insists on being the business, his or her ego gets in the way. If he or she would simply think bigger and allow a system to replace his or her personality, he or she could replace him/herself and let the system do the hard work. Always ask yourself how you can achieve the same result in things you do but without you having to do the work. (A great book on this topic of going from a small to big business is the book “E-Myth” – highly recommended!)
I am extremely impressed with your writing skills and also with the layout on your blog. Is this a paid theme or did you customize it yourself? Either way keep up the nice quality writing, it’s rare to see a nice blog like this one these days.
Hey Hans thanks for the post and you are so correct. When I started out in life I had all these dreams and as the years went by, I settled for some of them and forgot other. Point is though I find myself at almost 64 years old and I am learning a new way to live. and quite frankly I feel like I’m just learning to live correct.
Hey Ross, it’s never too late! Some people unfortunately will never learn. Great to hear you’re on the “correct” path as you put it.
I’m sure you’ve heard the story of Col. Sanders of Kentucky Fried Chicken – I think you’re a few years ahead of him. He was I think 67 before his restaurant was shut down, forcing him to choose another path whereby he began selling his famous recipe and franchising it into the thousands of KFC’s all around the world today! Thanks for sharing Ross – to your success!!
I amazes me how asleep most people are about their financial life. Most people just live pay check to pay check without even considering doing something else to increase their security. Starting my own business was just the 1st step in my financial future. The main lesson is the residual income you can make if something goes wrong, without that you will be at the mercy of kind hearted relatives. I would think that this economy would have woken up some people to the fact that they have to be self reliant if you ever want to develop wealth.
Hey Joyce, that is a great point. Unfortunately, I think most people are content to just be as they are. As long as they have enough to get by today, they focus more on how to distract themselves from the pain in their life or turn their back on it to instead focus on more fun and exciting things. The problem is, that doesn’t solve anything. Once the weekend is over, once Monday morning shows up again or the bills for next month appear, the cycle and all the related stress comes back. Many people don’t realize they are in this cycle, nor do they realize that there is a way out of the rat race. That is why I wrote this article, to really help people understand where they are at and what choices they have should they want to CHANGE that position, to go after their dreams and goals instead of just settling for what they’ve got…
This is a powerful article what resonated with me most is what you say about people with JOBS I imagine most of the people that read this will fall into that category or have at one time or another.
I like how you exhort people to learn and educate themselves on what they need to do about taking control of this and their financial futures. I love the way you end with a solution which is really the most viable and most practical way to go the world of network marketing great job guy!
Hey Steve, I think a lot of people today simply are unaware of the options and real choices they have available today. Most do not know there is something else out there for them besides a job. The fact is, it is possible for anyone who wants to change their financial situation to do so by starting their own business – regardless of their past or present circumstances; all they need is the desire to make a change and the courage to start. Start where you’re at, increase your skills as you go – learn while you earn, as they say. Once someone KNOWS there is a different way, it’s up to them to make the change… Thanks for your comments Steve!
Wow, Hans. This is such a valuable information for me. Your discovery is very shocking. I will pay more attention to control the financial cost and profit from now on. Great job!
I found the information I read here very helpful. I like the way you broke this down into three areas. I can see how effective this would be in gaining control of my income.
Shanae, simple is better 🙂 We can all understand simple. That’s why when you hear Fed chairman Ben Bernanke speak he has to make everything sound so complicated and make up his own language (like “Quantitative Easing” instead of Money Printing, etc) so the average person cannot understand or follow him and just think (or hope) that he must know what he’s doing! It’s tragic really. In fact, if his actions were made to be more transparent I think we’d all realize how much we do not need him or the Federal Reserve (but that’s a topic for another day)!
Thanks for your comment! ~Hans
I’m awe-struck Hans. I spend some time on this blog and it was a big learning curve for me. I feel like I just took a course. Well done my friend. I’m a #2 Sole Business Proprietor for years now. The only education I have in the finance of it all is from my accountant. I must admit I don’t pay attention to it much. Now that I have gone over this post, my knee-jerk reaction is to understand the financial part of what I am doing in my business. You have taken everything that seemed complicated for me and made it easier to understand.
Thank You Soooo Much,
Donna, thank you for the kind words. It’s amazing how information like this relating to our finances and money has never been taught to us formally, whether in school or through business, or anywhere else unless we specifically search for this information. It’s no surprise then I suppose to see so many people in such dire straits today financially unfortunately because they never learned about these things. Hopefully we can get the word out there to help educate people financially to prevent so many people from being so vulnerable to the crooks and con-artists out there.
Thanks for sharing your comments and glad I could help! ~ Hans
You raised some really important points that people need to evaluate when deciding how to create wealth for themselves and their families. People often jump into opportunities blindly, not really knowing the level of work required, and find it either mind-numbing and monotonous (lots of J.O.B.’s) or all-consuming and overwhelming (running a small business).
Personally, I think BIG business is not available to the masses, so while the benefits can be significant, it doesn’t feel like all that viable of an option.
I think small business ownership actually can be done in a way that is profitable and manageable. I know many bus. owners who run fairly hands off franchises or SB’s, and sure there are times where it becomes a headache if a manaager quits, etc., but depending on the business (ie. small # of employees to deal with), you can hire a great manager and create an environment where they feel valued and committed to your mission, and you can oversee things as needed. I also know many independent contractors who develop their expertise and can charge high dollar amounts for their services, and therefore can work sa, 20 hours a week, and make more than most would make working 60 hours a week.
And then of course, I’m naturally a huge advocate of participating in network marketing to create passive, residual income with low risk and huge upside potential ~ when treated like a business.
It’s all dependent on the individual, their out-of-the-box thinking, risk level, mindset, etc. Thanks for a great post, Hans.
Beth, you’re right! The size of the business isn’t what determines how successful a business can be, but rather it is the mindset, the thinking, that determines it’s size. A franchise is a great example of a big business – someone had the vision (“big” thinking)to put in place a SYSTEM (vs a personality) in order to replicate the success model of a successful business. Therefore the chain can expand to multiple locations without the original owner present or involved and still continue to grow his or her income.
Small businesses like accountants or lawyers on the other hand are able to leverage their efforts and therefore multiply their income, however, in most cases they remain small as they are unable to leave the business or practice and still increase the business’ income without their presence (personality-driven vs system-driven model).
So while a business may need to start out small it does not need to remain that way; those with the proper business model and the proper mindset however can go on to reap the benefits of residual income and financial independence.
Thanks for your comment, Beth! ~ Hans
Wow what an extensive view on “Asset Protection” Creating Wealth By Taking Control of How Your Income is Earned.
Taking control of your situation is the key to financial stability.
It can be difficult for some who lives from paycheck to paycheck.
Having said that some “big business” owners, not that they find it difficult, they just don’t take control of their finances and just let it all go to waste (unorthodox spending).
Knowing where you are and knowing how to how to take control of your income seems hard for some but it is vital that we take the time and effort to do something about it to gain financial freedom in our later life.
Irene, in my article on Creating Wealth 101, I lay out how creating wealth is not simply a matter of making lots of money. In creating wealth, one must take into consideration both income and expenses. If your expenses are out of control in the example you gave, no amount of money will ensure (on insure) your wealth. Thanks for your comment! ~ Hans
Very interesting article. Having spent most of my life in the corporate sector, as a worker-bee – I can vouch for the limitations. I am a huge fan of the solo-entrepreneur life – left my last corporate job (global company) last August and have never been happier or healthier – now, one day I hope to also say “wealthier” but at the moment I’m feeling pretty successful and grateful for where I’m at.
Marquita, congratulations on taking the step forward! Glad to hear about your success thus far! Life is a whole lot more enjoyable and RICH when you’re in control. Thanks for your comment! ~ Hans
Hans, this is an excellent, comprehensive yet very easy to understand explanation of the different quadrants.
I enjoyed reading it!
Joyce, appreciate you stopping by to share your comments! Glad you enjoyed it!
This information I feel is lacking out there in the world today. I think it’s important people understand the big picture and the long-term, as in, “If I keep doing what I’m doing for the next XX number of years, where will I end up?”
Most people do not give this much consideration, if any, unfortunately and are only thinking about today, this week or this month. Times are tough but for things to change, people have to really think about and plan out their life. “Failing to plan is to planning to fail…”
Thanks again Joyce! ~ Hans
Great blog mate! Loads of great content. I love how you hit the nail on the head with these stats and shocking truths.
To be 100% reliant on a company as an employee is not the way forward for people in the know. I totally agree with your vision and teachings. Thanks for spreading the word of true wealth.
(liking the classic house Sandstorm track on your Youtube video)
Aidan, thanks for the feedback! Editing/producing videos can take some time so I like to have fun with them and make them somewhat entertaining and enjoyable if possible – glad you liked it! ~ Hans
I like the point on the small business owner, who ends up owning a high paying job. Which is still better in my opinion than being an employee but some may not agree. At least you have the option to hire out. But using a system like a big business does is so much smarter. That’s why we’re in MLM! Have a good day bro. – Alex
It all depends on what you want. If ego is your motivation, then I’d agree a small business will suit someone better than a job. But for someone looking for financial freedom – to have the free time and money to enjoy it – a big business is really the only answer (remember, it’s mainly a different mindset that separates a big business from a small one – run by systems for the long-term versus dependent on the personality of the owner). Thanks for your comment! ~ Hans