Unveiling the Four Pillars of Financial Prosperity: Understanding the Four Types of Income

In the pursuit of financial independence, understanding the various sources of income is crucial. While most people are familiar with the concept of earned income from a job, there are actually four distinct types of income that play a significant role in shaping one's financial well-being. In this blog, I will delve into the four types of income, shedding light on how each contributes to overall financial prosperity.

Earned Income: The Foundation of all income. Earned income is perhaps the most traditional form of income and is derived from employment. Whether you're working a nine-to-five job, freelancing, or running your own business, earned income is the compensation you receive for your time, skills, and expertise. While it is the primary income source for many, relying solely on earned income can limit financial growth. By no means am I knocking anyone who is an employee. I was a Police Sergeant for 27 years and enjoyed every minute of it. I realized early in my life that I needed a job that gave me an adrenaline rush, police work gave me this experience. I realized that I was never going to become a millionaire working as a police officer, that's why I became an entrepreneur and started my real estate portfolio while working full-time as a police officer. Andrew Carnegie was quoted as saying, "90% of all millionaires became so through real estate. " That quote stuck with me because I came from a very humble upbringing. Being a multi-millionaire takes patience, drive, careful calculated risk and a determination to being "comfortable being uncomfortable."
Many people work their 9-5 jobs and are not building their own dreams. If you are giving 8 hours to your employer, what are you doing with the other 16 hours? Many people are very comfortable being an employee and I was government employee also. Many people are oblivious that police officers make six-figure salaries and in most police departments have unlimited overtime, if officers are willing to work it. My job allowed me to make extra money when needed and also made it easier to take calculated risk when purchasing investment property. I was a hustler and routinely worked 60 hours a week while still fully managing my own rental properties myself. So, it is possible to make a modest salary through a normal job and still run a business on the side. Presently, I am now retired and enjoy my full pension which puts me in position to work because I want to, not because I have to. I now run olmosventurecapital.com and there's no better feeling than being your own boss. I encourage everyone to at least attempt a side-hustle, especially if you have a unique skill-set. People who are in sales and have this unique skill-set can easily venture off on their own once they master this skill.
Exploring other types of income can pave the way for a more diversified and resilient financial portfolio.
Passive Income: Earning While You Sleep Passive income is the dream of many aspiring investors and entrepreneurs. This type of income is generated with little to no active involvement once the initial work has been done. Examples include rental income from real estate, dividends from stocks, or royalties from intellectual property. Building passive income streams requires upfront effort and investment, but the potential for long-term financial stability makes it a crucial component of a well-rounded financial strategy. It should be noted when I say real estate as being passive, yes you make money while you sleep, but it does require constant monitoring. For example, there are times when I don't have calls for service at my apartment buildings for several months in a row. Tenants Zelle me the rent every month and you may think this is great. My advice to future landlords is to conduct, at a bare minimum, quarterly inspections of each apartment. Sometimes tenants are not keen on advising you of leaks and repairs that if left unchecked can be costly.
Portfolio Income: Riding the Waves of Investments. Portfolio income, often referred to as capital gains, is generated through the buying and selling of assets such as stocks, bonds, and real estate. When the value of an asset increases, and you sell it for a profit, you earn portfolio income. On the flip side, if the value decreases, you may incur capital losses. Successful investors carefully manage their portfolios to maximize gains and minimize losses, making portfolio income a dynamic element in the journey toward financial success. It is also very important to learn the U.S tax code (yes, all 7,100 pages). Learning the tax code and the possible write offs can greatly improve your financial well-being. I once made the mistake of selling off an apartment building without tax planning (I had to write a 6-figure check to the IRS). It is imperative that you educate yourself on tax planning or pay for a consultation with a tax strategist to mitigate your tax liability. Please educate yourself with the difference between a tax preparer and a tax strategist.
The ultra-wealthy usually never sell their assets and usually live on "debt." which if done correctly, is a GAME CHANGER in the game of positive arbitrage. Most of us have been brought to avoid debt because debt is bad. What if I told you that the ultra-wealthy use debt to their advantage. A brief personal example I use is to use a Home Equity Line of Credit and use that money to make hard money loans. Take for example Elon Musk or Jeff Bezos. Most people become very upset that in most years, these individuals pay no income taxes. So, you are probably asking yourself how does someone who makes billions every year pays no taxes? These individuals request to get paid in stock options within their companies. So technically they have not taken a wage and let's say Elon gets paid in stock options every year for the last 10 years. So now you ask the question - how do these guys live an extravagant lifestyle and pay their bills without a wage? These guys just go to a bank and show the value of their stock options as collateral, and they are given millions of dollars through a very low interest loan. At this point these guys are living off this low interest loan/debt and you do not pay taxes on debt. So, throughout the years they get paid in stock options which have probably doubled and tripled which essentially means their net worth continually doubles and triples every year. The Ultra-Rich usually never sell their assets, real estate or stocks, they just take loans/debt against them and avoid large capital gains tax. You can also use IRS code 1031 and sell your property but use the proceeds to buy a bigger more profitable properties and avoid capital gain taxes. Use IRS code 179 and purchase a vehicle and completely write it off against your business income. Another tactic to avoid capital gains and keep the governments hands off your money is to place your assets in a revocable trust so your kids can inherit them on a stepped basis and in most cases your kids will inherit your assets tax free. Please consult your tax professional as these are just unique examples illustrated.
Business Income: Entrepreneurial Ventures. For those with an entrepreneurial desire business income is a potential goldmine. It is generated through activities related to running a business, be it a small startup or a large corporation. Business owners can benefit from both earned income through their active involvement and passive income through the success and growth of the business. Building a successful business requires dedication, strategic planning, and a willingness to take calculated risks, but the rewards can be substantial. I'll give a unique tax tip to tax defer up to $76,000 through the use of a self-directed solo 401k. I will have a blog specifically explaining the intricacies and power of this IRS authorized tax loophole.

Understanding and leveraging the four types of income can significantly impact your financial success. While earned income provides a stable foundation, diversifying into passive income, portfolio income, and business income can enhance your financial resilience and open the door to greater opportunities. Striking a balance among these income streams is key to achieving long-term financial prosperity and independence. Take the time to assess your current financial situation and explore avenues for growth in each of these income categories. Your financial future may thank you for the thoughtful and diversified approach. Take the calculated risk and be a visionary. The power of delayed gratification is something I was willing to endure. Holding my assets year after year and not selling has allowed me to be in a position to finally live a life that has allowed me so much freedom.

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