If you want to build wealth, you must understand the two ways to produce income which I call Type 1 and Type 2.
Type 1 Income: “Work = Get Paid Money” & “Don’t Work = Don’t Get Paid Money”
- A job where you exchange your time, talent, and energy for a paycheck.
- Sometimes referred to as “aggressive streams of income”
Type 2 Income: “Get paid whether or not you are working.”
- Your money produces more money without requiring you to work for it
- Sometimes called “passive streams of income”
The wealthy are well aware of Type 2 Income. It’s why they have become wealthy.
Type 1 Income requires your physical presence and effort. It is how must of us learn to produce income from a very young age. We perform a task and receive compensation for it. In school we’re told time and again, “Study hard so you can get a great job.”
Each of us, however, is limited on the income we can produce using Type 1. Even if you are a doctor or highly compensated sales person, you are still limited by the hours of the day.
This is why it is important to move money generated from Type 1 Income activities into Type 2 Income producers.
You may already be doing this at some level without realizing it! For example, if you are contributing to your retirement savings plan, you have captured the power of Type 2 Income. The investments within your RSP (401k, 403b, 457, TSP, IRA) are working for you – producing growth and income – without requiring any additional work from you.
Joseph Sangl’s book: Oxen: The Key To An Abundant Harvest Written for the person who is keenly interested in building up their Type 2 Income, this book will help you identify potential “Oxen” – investments – that will grow your net worth and position you for a fully funded life at retirement – perhaps at a much younger age than you think!
One of the great gifts a parent can give their child is to teach and model life skills that will help them live a better life. Transferring excellent money management training and skills to your child will help them have financial confidence as they navigate life.
If you are wondering where to begin, start with the list below!
10 Money Lessons Every Parent Should Teach Their Child
- Monthly Budgeting The power of planning money before it is spent helps maximize each and every dollar.
- Consistent Saving Saved money prevents a lot of financial stress.
- The Power of Compound Interest Use compound interest calculator (like this simple one) to show them how time, rate of return, and amount invested will yield exponential results.
- Waiting Many terrible financial decisions are made impulsively. By learning this important lesson, your child can avoid many financial mistakes.
- Form Good Money Habits Good habits are just as difficult to break as bad ones. Help them “make it their habit” to budget, save, invest, and plan the rest.
- Generosity Generous living can help prevent greed and selfishness and positions your child to be a blessing to all who know them.
- Debt Discuss various types of debt: Installment debt (paying something off – a car, a home, etc) and Revolving debt (continuously accessible debt – a credit card or line of credit). Teach them how interest rates and payment terms affect their ability to pay off debt.
- Investing Show them various types of investments: mutual funds, stocks, bonds, real estate, precious metals, small business, franchise, and intellectual property
- Passive Income Demonstrate ways to generate income without having to work for it (dividends from stock ownership, rental income from commercial property, and business ownership income
- Net Worth Share specific ways to increase assets in a tax-advantaged manner.
I’ve never heard a parent say, “I educated my child too much about money.” However, I’ve heard tens of thousands say, “I wish I had learned this stuff before I entered the real world.”
Joseph Sangl’s book: What Everyone Should Know About Money Before They Enter The Real World It is a perfect resource for young people – from high school students to those in their mid-20’s. It has been written with prevention in mind – to help young people become financially confident and avoid common financial mistakes.