Determining the Type of Income That Will Suit Your Lifestyle
There are three different types of income. Each one has a distinct manner by which the income is sourced, specific requirements by which the income is attained and different rates by which taxes are determined. The three types of income are active, passive and portfolio.
Active income is the most commonly earned income. Examples are a salary, wage, tips or commission from a job. Active income is basic compensation for your time, whether as an employee or business owner. The disadvantage of active income is that time is limited; therefore, the amount of active income one can earn is also limited.
Passive income is received from a business situation that you are not aggressively or currently a part of. Instances of passive income are interest on accounts or rental income. It can also be income from work completed previously that results in payments afterward, such as a pension.
Portfolio income results when one plans and invests in stocks. This allows money to grow and may include additional income through interest, dividends and capital gains. When retired, an advantage to portfolio income is that it is not subject to Medicare or social security taxes. If there are portfolio losses, they can be used to offset taxes from capital gains.
Considering the different types of income, many may conclude that they would prefer passive income over active income as it seemingly requires less effort. However, passive income entails a bit of planning and work early on to allow for situations that would provide an income at a later date. Active income is not only a guaranteed income; many times, it also provides other benefits such as medical benefits and 401(k). Depending on your situation, an active income may be the best option, especially if you have responsibilities and a household dependent on your income.
How does one decide the best route to balance their current and future goals? For most, it will be some mix of all three types of income. Whatever your income type, you should set realistic goals, perhaps work with a financial advisor, and determine how you can achieve your aspirations.
Each income is associated with a different tax rate; therefore, determining the tax structure based on income stream may be tricky. You may want to seek a financial advisor's advice, or a search on the Internal Revenue Service's website will help clarify.
Active income is subject to the most current income tax rates. As an employee or self-employed individual, this is the most common form of paying taxes. Self-employed individuals also must manage their own Social security and Medicare taxes.
Passive income is based upon the extent to which the investment has been held if it has been less than a year, it is considered a short term investment. If longer than a year, it is classified as long term investment. The tax rates for short term and long-term passive income differ based on various details and may change with new tax laws. Capital gains are profits received from selling a property or investment and are subject to taxes. A consultation with a financial advisor will offer the most up-to-date information related to your particular financial situation.
Finding the right balance of various income streams that work with your lifestyle and financial goals can be an intimidating process. Information is key, and the more knowledgeable one becomes about the various opportunities available, the more comfortable one will feel about venturing into new roles and financial avenues. Having a trusted advisor as a guide is a great way to avoid mishaps and learn how to implement additional streams of income.
Important Note: Nothing in this article constitutes investment, tax, and/or financial advice. All investments have risks and may not be suitable for everyone. You should seek advice from an independent financial advisor. The mention of products, services and business in this article does not constitute an endorsement or recommendation.
How to Create Generational Wealth in Any Income Bracket
Most times, when discussing generational wealth, the conversation is about higher-income families, and usually, the beginning of the succession dates back to a period long ago. Generational wealth is defined by assets left from one generation to another. Money, properties, businesses, and other items of value are typically passed down through generations when there is an abundance of financial means to be shared. However, generational wealth can begin with any generation, in any income bracket, at any time. Families that do not currently have significant financial access need not eliminate themselves from the possibility of having assets to pass on to future generations. Smart decisions and planning can grow a small amount into a legacy.
There are several ways that assets and wealth can be left to family and subsequent generations without earning millions during your lifetime. Obviously, to leave anything of value to your loved ones, you must acquire assets to pass on or save more money than you will use in your lifetime. One such way is to provide protection through life insurance. Insurance can defend against financial loss due to death by providing financial benefits to dependents. The earlier in life the policy is started, the lower the rate. Policies can cover funeral expenses and, in some cases, provide your family with financial benefits. Another option is a term policy which will expire at a set date, allowing you the possibility of enjoying the benefits of the payout with your family. The payout can also be used to cover any taxes your family may incur when their inheritance is finalized.
A way to accumulate wealth is through your employer's retirement plan. Be sure to maximize your employer's match provision as much as possible. The more money you can amass in your retirement account, the better situated you will be financially in the long term. Your retirement portfolio will amount to more than you need in the best case scenario, allowing you to leave the remainder for the next generation.
Contemplating stock investing but did not know how to start? There are many options in the stock investment area. As a beginner, you might consider using investment apps such as Stash, which allow you to purchase portions of a share. You will still reap all the benefits of owning that stock, including the profits and dividends, without having to pay hundreds of dollars to own a full share. Investing in Mutual Funds can long term lead to wealth. Mutual funds are ideal for many because they are low cost and offer diversification. When investing, be sure to evaluate any fees or costs and risks involved.
Another consideration should be how you invest. No matter how minimal the amount, utilizing the funds you have in different types of opportunities allows for multiples avenues of revenue. For instance, for as little as $500, anyone can invest in real estate through a company called DiversyFund. Diversifying funds in both stocks and real estate is how most wealthy individuals maintain and grow their wealth.
Whenever possible, purchase and retain the property. Typically, property retains or increases in value over time, especially longer periods of time. Passing on a property that has been paid for would be a great achievement, no matter the value. Inheriting a property that provides a cash flow would be optimal. By the time that same property is passed down to the 3rd or 4th generation, it will be worth much more, allowing for leverage and equity to be used to build wealth in other ways.
Most importantly, make it a priority to have an updated will and estate plan established. Without them, time and money will be lost as the courts and your family are left to decide your final wishes. It would be best to decide who your beneficiaries are for each of your assets. With proper planning, the ultimate gift of generational wealth can make a smooth transition and avoid legal hassles and unnecessary taxes. This can all be arranged ahead of time by consulting a financial advisor.
Important Note: Nothing in this article constitutes investment, tax and/or financial advice. All investments have risks and may not be suitable for everyone. You should seek advice from an independent financial advisor. The mention of products, services and business in this article does not constitute an endorsement or recommendation.
Small Business Concepts for Entreprenuers
If you’ve decided 2021 will be the year to get ahead, catch up or just start something new, join the movement of side hustlers looking to do the same! Side hustles are small businesses that provide a secondary income. For some, the side hustle can grow to become their primary source of income. The key to choosing the right side-hustle is to consider your existing interests, skills and previous work history. The more you need to adapt and understand about a new endeavor or job, the longer it will take to do well at it and the better chance you will become frustrated before you succeed. Consider your options wisely, ultimately selecting one that will align with your passions, personal time that can be dedicated and experience.
For those looking for a positive change and have an entrepreneurial mindset, listed below are some of the most popular and likely to succeed side hustle endeavors. Most do not require major funding or office space and rely primarily on your personal skill set and drive. The greatest advantage to most of these businesses is that you can set your own hours and the growth potential is as limitless as you desire if operated and marketed properly.
Technology Device Repair Service
Skillset: Tablet and phone screens crack on a daily basis and simple repairs can be costly. Providing the same services for less will attract a client base that can easily grow by word of mouth and great customer service.
Costs: Aside from simple tools and parts to start there should not be any other initial costs. The services can be advertised for free on social media and unless you require a training class your skills are already paid for. All of the repairs can be done from your home in your spare time, therefore there will not be an expense for office space.
Once you have established yourself and have more work than you can handle, additional help can be brought on in different locations, increasing your revenue without adding to your time.
Using your Writing Skills
There are several businesses that can be successful if you have a way with words.
Blogging. Although it may take time, once a blog becomes popular, a blogger can profit tremendously through advertising.
Proofreading. Such a service is crucial for those in academia, executives or anyone that needs a professional review of any type of written documentation. An English or journalism background would be ideal for this type of business.
Resume Assistant. As many navigate the ever-changing job market, a perfect candidate for this role will have a background that has educated them to showcase your client’s talents and offer critical editing.
Skillset: Expectations will be high and your business will grow partly by repeat business and referral so you must be confident that your editing skills are on point to succeed.
Costs: None of these businesses require more than a computer, your skills and a website.
There are several services in demand that people will gladly pay for others to provide. Here are just a few:
- Dog walker / Pet Care
- House Cleaning
- Elder / Child Care
- Errand Runner
- Gardening/Snow Removal
- Mobile Car Detailing
- Organizing Services
- Re-selling Items for others
- Preparing meals for sale and delivery