Earning Money

[BookClubEditor]

Have you ever noticed those people in your gym who don't seem to be working out any harder than you, but are in better shape? A higher metabolism can help you stay healthier, just as income that is working more efficiently can generate more income.

What's Your Earning Capacity?

What many of us don't realize is that benefits (for example: day care, health care, disability, and so on) hold enormous potential for your true earning potential. So do your 401(k) matches, bonuses, stock options, dividends, interest, and so on. You just need to master ways of making the most of them. That's why you need to really understand your greatest asset -- your ability to go out and earn an income. If you're 38 years old, earn $43,000 a year, and work until you're 67 years old, that represents over $1,240,000, assuming you never get a raise! What do you own that's worth more than that?

Every year we spend thousands of dollars protecting our material goods, but we overlook protecting our ability to earn an income. Look into a disability policy either through your company or, even better, an individual plan. Over 65% of all defaulted mortgages default because the owner became disabled.

Three Types of Income

What if I told you that the most powerful way to earn an income isn't by punching a clock? Remember that the real benefit of a speedy metabolism is that it works for you even while you're at rest.

Active Income is income for which you have performed some service: your wages, tips, salary, commissions, and income from businesses in which you have material participation. Add your Wages, Tips, Salary, Commissions, and other such income to get your Total Active Income. Write down this number!

Passive Income comes from rental property, limited partnerships, or other enterprises in which you are not actively involved. You've heard of the studies that show after you've exercised, you continue to reap the benefits for several hours afterward? It's the same with passive income. Write down the source of any passive income and the amount, then add them for your Total Passive Income.

Portfolio Income comes from investments, including interest (from savings and CD accounts), dividends, royalties, and capital gains (typically from equities and real estate). Returns in these accounts really add up. Did you know that if you can increase your return by 1% through these kinds of investments you can create an additional 10 years of spending? Write down the source of any portfolio income and the amount.

Ultimately, your goal could be to replace the first type of income (Active Income) with Portfolio and Passive Income. If you observed millionaires and multimillionaires in this country, most of their earnings come from passive and portfolio income, some of which can be tax-free. On the other hand, most people's income comes from active income -- all of which is typically taxable.

Let's create more passive and portfolio income so your bills can be paid, you can work less, and you can spend more time with your family and friends! This is the heart of The Net Worth Workout.

Maximize Your Income

Let's look at an example of how powerful the different types of income can be. Let's say you have some Portfolio Income: It's that $50,000 you have sitting in a CD earning 5%. You shopped around a lot and the bank was able to give you this 5% rate that you were very pleased with. At the end of the year, you have to declare this income you earned and it's all taxable. So if you live in a big city, and maybe you're in a high tax bracket, the IRS (Federal, State, and City) will want to be paid too. That could be 44% or even more! So now that terrific CD rate of 5% has only returned 2.8% to you! You're left with only $1,400 more. To relate it back to fitness, let's say you have a donut in the morning (about 360 calories). Don't you usually have a sugar spike and then begin to feel hungry soon? This "fuel" didn't do that much for your metabolism, did it?

On the other hand, if you took that same $50,000 and invested it in a short-term municipal bond that is issued by the state you live in with a yield of 4%, you get to keep everything you earn. You don't have to pay the IRS since municipal bonds are tax-free! So you have $2,000 that can be reinvested. And if you do that every year, imagine how much farther ahead you'll be! In other words, instead of having the donut, you had a bowl of whole grain cereal with plenty of nuts and fruit. This could be 350 calories too but you will go much farther with it!

Maximize Your Benefits

What's amazing is only 10 to 25 percent of employees take advantage of benefits outside of the traditional ones like health care and retirement plans. Did you know that the typical employer spends an additional 20 to 40 percent of employees' compensation to provide them benefits? Some examples:

Corporate discounts for major retailers
Free or reduced legal services
Concierge Services
Discounts at Health Clubs

After you have health care and retirement plans, you should look into having health care, child care, and transportation spending accounts. The reason why they're so powerful is you're using before-tax money to pay for health, child, and transportation expenses instead of after-tax money.

Turning the Found Income into Income

The point is to create income from income, so when you see these numbers I think you'll be pretty pumped up!

Let's say Mark and Jane rearrange their finances, "find" an extra $177 a month and open a Roth IRA retirement account. The contributions aren't tax deductible, but assuming all conditions are met, the money is withdrawn completely tax-free, typically after you're 59 ½.

Mark and Jane are 30 years old, and they invest the funds into the S&P 500, which typically has averaged 10% a year since the early 1930s. And since they "found" this money they continue to add $177 a month until they're 67 years old. Guess how much tax-free money this "found" money will be worth when they're 67? It's $847,696 … tax-free!! Even if they withdraw only 5% every year it's generating over $3,500 of tax-free income to them every month. (Meanwhile the other 5% is being reinvested to grow the $847,696.) Now that's quite a find, isn't it?! What I love about this example is it all began with very modest everyday costs: the transportation costs, health care costs, etc. that all of us need to pay for.

Discussion

1. Do you have any "found" money? Were you surprised to learn that you did (or didn't)?
   
   
2. Make a list of your employee benefits. Now pat yourself on the back because only 25% of employees even know they exist!
   
   
3. List three ways you are already maximizing your employee benefits.
   
   
4. List three ways you could be enhancing your benefits.
   
   
5. Were there any benefits that you found were offered that you didn't expect? What were they?
   
   
6. Were there any benefits you found that you felt you had overlooked or ignored before now? What were they and how will you change your situation?
   
   
7. How will understanding your benefits help you in the future?