Convert Your Earned Income To Passive Income And Build Generational Wealth

The truth is many people, including you and me, don’t want to pay taxes. And in recent times, the biggest question, from my team and I (to you), has been, “Are you willing to do what it takes to not pay?”

If you are willing, you should be looking into passive income and how it helps you build generational wealth. In this article, I provide a deeper look into passive income and its connection to taxes. Passive income is also taxed by the IRS – but not the same way as earned income. They are taxed differently – in a good way. And the end result is you pay less taxes than you could have without passive income. Therefore, converting your earned income to passive income is another tax strategy you can use.

Earned Income vs. Passive Income – A comparison

Earned Income

Earned income is what you get paid after doing some work. This, according to the IRS, includes wages, salaries, bonuses, commissions, tips, and net earnings from self-employment. Earned income also includes long-term disability and union strike benefits. Payments from certain deferred retirement compensation arrangements can also be counted as earned income.

So, according to the above, earned income can be viewed in two ways. These are: You work for someone who pays you: You own or run a business or farm that earns you some income.

All your earnings from these sources are subject to maximum taxes.

Passive Income

Passive income defines earnings you gain without putting much effort. Sometimes you don’t put any effort at all – resulting in the moniker, “Making money while you sleep.” Examples of passive income include rental earnings from your property or real estate and earnings from adverts that run on your website or YouTube channel. Dividends from stocks you own are also forms of passive income.

The passive income you earn is received automatically. There is no need to keep maintaining it. Whereas active income requires you to work to earn, passive income earns you money without clocking in the hours.

Why passive income?

Have you ever considered why we all have 24 hours a day, yet some people make more money than others? We say that time is the greatest equalizer – and it’s true. But we find ourselves living differently over the years even as we share the same 24 hours a day.

I will be honest – if you want to also make a difference in your life, start thinking of how to make more money using passive income. In other words, think about how to earn away from your usual workplace. You could be stuck in some office wherever in the world, passive income must be trickling in from other places. You could be sleeping in your mansion, cave, or one-roomed house or basement, whatever. Still, passive income can be earned as you enjoy your sleep. You just got to devise means of doing so as we shall explore.

Besides just adding to your net worth, passive income is not taxed the same as earned income. There are real tax savings you gain from passive income. In other words, making more passive income accelerates your journey to building generational wealth. It increases the amount of money you save to invest at a later stage.

Finally, passive income helps you pay the bills. It saves you from living on paycheck-to-paycheck. The more you no longer depend on your salary for everything, the more you can save. And the more you save, the more you can invest and build generational wealth. That is what passive income gives you!

Ways to convert earned income to passive income

To gain immediately from passive income, push all your profits/earnings into investments that earn you passive income. As such, the ways below must be pursued using your earned income so that when profits come from these investments, they are passive income.

  • Invest in real estate – Income you earn from your property portfolio is viewed as passive income by the IRS. And this income is reduced by depreciation and amortization. Therefore, the effective tax rate on these is lower. There are many ways to invest in real estate. You can contribute to a savings account for years and buy a property. Or you can invest in a property fund or portfolio.
  • Invest in listed companies (the stock market) – Dividends you earn from the stock market are also viewed as passive income. As such, this becomes the profits you make (tax-free).
  • Invest in another business – If you put in your $500,000 in a business and not actively participate in it, you can earn passive income from it. If the agreement with the owners is that you earn a certain percentage of the earnings, that’s passive income. Only make sure you have nothing to do with the everyday running of the businesses you invest in.
  • If you are a techie, invent a product or an app – The royalties you earn from these are considered as passive income. Investments into such inventions are small amounts. So, you can easily use your earned income to invest in, for example, an App and earn royalties from it.
  • Buy government bonds – The interest you earn from your investment in bonds is passive income. Bonds are a great idea because some of them have a 30-year lifespan. So, instead of contributing to a retirement account, you can buy government bonds. They do have better interest and can increase over the years.
  • Write books – An investment of your earned income into a book can result in tax-free royalties earned from the book’s sales. If you become popular as an author, you will be looking at several thousands of untaxed dollars.
  • Build a website/blog – Targeting a specific market with news and other relevant content earns well on adverts. This usually requires small amounts that even an individual can afford.

All the above methods are used to convert your earned income into passive income. To note is the fact that making passive income requires capital. In this case, that is your earned income that you will invest. If you are a small business, your investment lowers your profits, thereby lowering your taxable earned income. The overall effect is that it reduces the taxes you pay but also increases your long-term income.

In the end, targeting passive income results in building generational wealth. Make this your priority for next year. If you need any help on how to do any of the above, get hold of any of our team members. We will be glad to help you build generational wealth. This and other tax strategies we offer are always winners!