Plastics & Income

Remembering the first time I held my hand on a supplementary credit card from my Parents back in High School, I was too ecstatic knowing I can swipe and sign. My dilemma then was if I’m going to make my signature short, creative or long. I was given the card for “emergency” purposes only to end up thinking that everything that I see are for emergency and that with my little allowance, I’d be able to pay for the excess of my credit limit.

Most of the charges were on food, cinema, gifts and gym memberships. As much as I felt generous giving gifts to friends – I have forgotten the essence of “emergency” and have always thought that not being able to attend the gym would be the death of me.

For a whooping Php 5,000 credit card bill in the 90’s, that sure was huge. My parents had to terminate my credit card. The day they confiscated it made me felt powerless and whined for days. I had to deal with what I receive everyday and proved to them that I can spend within the savings I allocate from my allowance.

At the age of 16, I was already paying for my own phone bill. Dad accompanied me at the nearby Telecommunications office, gave the necessary documents and signed the contract for me provided that I will pay for my dues on time and never will he use a credit card or ask him to pay for my dues.

At the age of 18, I already signed up paying for basic insurances.

The financial freedom of paying for my own bill was quite liberating at the same time overwhelming but up until this date, I pay for my own mobile bill and have never asked for their money to pay for any of the phones I’ve had.

If it wasn’t because of that credit card experience and the confiscating, I don’t think I’ll be able to step up and prove myself  that I can be financially freed to achieve what I want and to acquire what I need including food and cinema tickets or even shopping sprees.

Years after, fast forward. I now have my own credit card and owned two.Terminated one, kept the other which adds up mileage points and rewards, declined other bank offers and currently practicing the act of diligence, self-control and embracing the value for money.

Always keep in mind that Credit Cards are money that aren’t yours but you can reverse that by maximizing and using it wisely. Swipe and pay at the end of the day through online banking and do daily monitoring of your finances – call your bank, they’d gladly reverse all additional charges just so long you pay always in full or you pay accordingly everyday. That way, you earn points and don’t accumulate interest. Keep your credit limit to minimum so you won’t go overboard.

At the age of 25, not only am I paying for my own phone bills and insurances but also other investments (and shopping).I’m still learning but hopefully, I will get there.

Hopefully before I hit or by 30, I’ll be able to generate enough money to sustain and propel. For now, I aim to educate myself on becoming financially literate and get to find the type of income that would help me flourish not only my bank account but also my future.

Three types of Income:

  1. Earned Income
  2. Portfolio Income
  3. Passive Income

One of my greatest dream is to earn more by doing less from Passive Income.

Earned Income

Earned income is any income that is generated by working. Your salary or money made from hourly employment (regardless of whether that salary or hourly income came from working for someone else or from your own “consulting”) is considered earned income.

Some activities that generate earned income include:

  • Working a job
  • Owning a small business
  • Consulting
  • Gambling
  • Any other activity that pays based on time/effort spent

While earned income is the most common mechanism for making money, its obvious downside is that once you stop working, you stop making money. Additionally, because the amount of money that is made through earned income is directly proportional to the time and effort you spend working, it’s difficult for someone to make more earned income without either learning a new (or more valuable) skill or working longer hours. Additionally, earned income is taxed at a higher rate than any other type of income.

One huge benefit of earned income over the other income types is that you generally don’t need any startup capital in order to make earned income, which explains why most people rely on earned income from the start of their working life. In fact, earned income is a great way to start your investing career, as it allows you to save up cash that will help you generate the other two types of income…

Portfolio Income

Portfolio income is any income generated by selling an investment at a higher price than you paid for it. Some people refer to portfolio income as “capital gains,” because that’s how the money is taxed by the federal government.

Some activities that generate portfolio income include:

  • Trading (buying/selling) Paper Assets — Paper assets refer to things like stocks, bonds, mutual funds, ETFs, CDs, T-bills, currencies or other types of futures/derivatives. Stock market investing is the most common generator of portfolio income
  • Buying and Selling Real Estate (specifically the profit from the sale)
  • Buying and Selling of any other Assets — Antiques or cars, for example, or other types of collectibles that have appreciated in value

There are a number of downsides to portfolio income; for example:

  • It often takes a good bit of knowledge and experience to learn how to make money trading paper assets. Unless you have inside knowledge of the companies you’re trading, you must learn to read financial statements or how to analyze market trends if you hope to beat the market
  • You often have little control over your investments, other than your ability to buy or sell. For example, buying stock in a company still affords you no day-to-day control over the operation of the company, and therefore little day-to-day control over your investment
  • Generating portfolio income generally requires you to have money to invest upfront. Even large gains are inconsequential when the investing amounts are very small
  • Portfolio income is often taxed at very high rates — equivalent to earned income in many cases

Portfolio income certainly has some advantages over earned income. Once you have the knowledge and experience to generate portfolio income on a consistent basis, you can continually reap the benefits (compound your return) by reinvesting after each sale. Additionally, any portfolio assets held long-term are generally taxed at a lower rate.

Passive Income

Passive income is money you get from assets you have purchased or created. For example, if you were to buy a house and rent it out for more money than it costs you to pay your mortgage and other expenses, the profit you make would be considered passive income. As another example, if you owned a business that could operate independently of your working for it, any money that you make from the business would be considered passive income (of course, if the businesses success was limited by the number of hours you worked, the income you made would be considered “earned income”).

Some activities that generate passive income include:

  • Rental Income from Real Estate
  • Business Income (assuming it’s not earned based on amount of time/effort spent — that would be Earned Income)
  • Creating and Selling Intellectual Property — Books, Patents, Internet Content, etc
  • Affiliate or Multi-Level Marketing

There are some major benefits to passive income over the other two types of income:

  • Passive income is generally recurring income; once the investment is made, and assuming it is a good investment, the income will continue to come in month-after-month or year-after-year, with little additional work by you. This means that you can essentially “retire” and still continue to grow your net worth
  • Investments that generate passive income usually allow the owners active control over the investment. For example, if you owned an apartment building or a corporation, you would have say in the day-to-day operations that would ultimately impact the success of your investment
  • Passive income investments often allow for the most favorable tax treatment. Corporations can use profits to invest in other passive investments (real estate, for example), and take tax deductions in the process. And real estate can be “traded” for larger real estate, with taxes deferred indefinitely
  • Because it is generally possible to closely approximate the return (or at least the risk) you can expect from passive investments, these investments can often be funded using borrowed money. For example, a good business plan can attract angel funding or venture capital money. And real estate can often be acquired with a small down payment (20% or less in some cases) with the majority of the money borrowed

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