According to research by www.dwebclub..com, only 10% of people actually inherited their money. The other 90% went out and made something for themselves. In this article, we will be looking at the basic foundation of all earnings and how you can be part of the 90% who create real wealth for themselves.

1. Money made from selling your time to an employer

The bulk of middle and lower classes earn most of their income in this quadrant. It is the monthly salary you receive from your employer from working at an 8am-5pm job (in reality, you actually work longer than this). The rate you receive for your time depends on how rare and in demand your skills are to society. For instance, a gifted brain surgeon can charge millions of naira for a single operation because there aren't lots of people who can do the same job. A receptionist on the other hand would earn less, not because he/she is less valuable as a person, but because vitually anyone can act as a receptionist; it does not involve too many technical details.

To earn more money in this quadrant, you have to invest in yourself and improve the rate you can charge, or you work more hours or a combination of the two. This type of income is the most energy sapping form of earning a living because you only generate money when you are actively laboring. A brilliant accountant may earn lots of money a year, but he cannot continue to live off that money if he stops working. That may be fine if you love your job, but for most people, there are other things they'd rather be doing.

2. Interest income on money lent

This type of income comes from money borrowers pay you to rent your capital. For instance, when you put your money in fixed deposit, you are lending money to the bank in exchange for a predetermined rate of return, typically a few percentage points per year. The bank takes the money it rents from you and lends it out to business owners at a higher rate, pocketing the difference.

An example of interest income: I have a friend who lends money to working class individuals for a minimum rate of 5% per month to meet short term demands such as rent payment, school fees etc. Imagine if she lends you N1,000,000 for one year, she gets to make N50,000 on a monthly basis, amounting to N600,000 in the year! In essence, her money is going out and working for her.

3. Dividend income from profits on businesses owned

This represents your share of profits of a company in which you have bought an investment. If you own 50% of a food retail business for instance, and the company made net profit of N500,000 in the month, your share of this profit will be N250,000. That money is paid to you as your 'cut' of the earnings. A good investment is one in which the company earns more year after year, increasing the amount of cash that is sent to you on a regular basis.

I have a friend that used to work at GTBank. She resigned a couple of years ago after investing in several properties in lagos. Now, she lives off the rental income she makes from those properties. In this case, her rental business is generating profit equal to the total rent she receives less any costs, such as maintenance and upgrades on the properties.

4. Capital Gains income

This type of income is generated when you buy an investment or asset for one price and sell it for another higher price, making a profit. The investment could be houses, rare paintings, diamonds, businesses, furniture, stocks, bonds or mutual funds. If you buy it at one price and sell it at another, the profit that results is known as a capital gain (if you lost money on the transaction, it is known as a capital loss). Going back to my previous example in '3' above, if my friend were to sell one of the rental houses she bought for N1,000,000 to a buyer who was willing to pay N3,000,000, then the N2,000,000 difference represents her capital gain.

Summary

True financial independence comes from diligently building a collection of 'cash generators' that bring in huge amounts of the latter three types of investment income - interest, dividend and capital gains.

The reason why real financial independence does not come from option 1 is because money made selling your time for salary and wages is often taxed at far higher rates than the other types of income. I know people who pay as much as N150,000 in taxes. The unfortunate bit about us in Nigeria is that the tax is not being put to any profitable use. The roads are still bad, there is no power supply, there are insecurity concerns etc. So you eventually still use part of your net salary to take care of these problems, hence paying twice.

Another reason why financial independence does not come from option 1 is because there are only twenty-four hours in a day. Thus, you can only work so many hours in a day. At some point, it becomes physically impossible to sell more of your time because, well, you ran out of time! You can always increase the rate you earn by developing rarer skills that are in high demand, as we already discussed. With interest income, dividend, and capital gains, there are virtually no limits to how much you can earn. If each year, you pile your money back into growing these sources, you can find yourself earning millions of naira each year a few decades from now.

Courtsey of www.dwebclub..com