Understanding The 3 Different Kinds of Income

The 3 different kinds of income:

1. Capital gains
When you buy a stock, and sell it for a higher price, you have made a capital gain. If you buy a house and then later sell it for a profit, you have made a capital gain. If you buy an antique at a low price and then sell it for a nice profit, you have made a capital gain. Capital gains are not passive income. They are a one-time payment that you receive from an investment because your investment has increased in value. Investing for Capital Gains is great because you can keep your money moving, instead of just letting it sit in the bank. The government loves to tax capital gains, especially if you bought and sold your investment in less than one year. Let’s say you buy a stock, and the stock doubles in price during the week so you decide to sell it. You’ve made a nice capital gain, but the government could take as much as 39.6% on that capital gain, depending where you are in the income-tax bracket. If you hold onto your investment for a year or more, the government rewards you with a more favorable capital gains tax rate.

2. Passive income
Passive income is payments that you receive from the assets you have created. These payments usually come monthly and require little or no work for you to receive them. Some types of assets that produce passive income are rental properties, dividend stocks, and businesses. Assets that produce passive income continue to do so until the asset is sold. Passive income is what makes a person rich. If a person has more than enough passive income to cover his or her expenses, that person is rich.

3. Earned income
Earned income is the primary source of income for most American’s today. Any type of job that pays an hourly wage, pays earned income. People who rely only on earned income, pay the most taxes. Federal, State, Unemployment, Social Security, and Medicare taxes are all deducted from a person’s paycheck. With passive income and capital gains, the types of taxes you pay depend on the investment. Earned income is not necessarily a bad thing. Having a job/career is a good way to earn the income to create assets.

Just about everyone who starts out on their journey to become financially independent begins with earned income. Many people rely on earned income alone, saving most of their earned income for years, until they retire. The path to financial independence requires making the transition from relying on earned income, to passive income.

“Use your money wiser. Then you get to retire.” Michael “MJ The Terrible” Johnson – Founder & Owner – Masters of Money, LLC.

3 Steps To Becoming A Millionaire – https://www.mastersofmoney.com/3stepstobecomingamillionaire/

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