There are 2 different categories of income namely active income and passive income. Active income requires me to actively work for the income. The moment that I stop working, my income will stop coming in too. Based on the cashflow quadrants by Robert Kiyosaki, the employee derives active income.
For example, if I were to work as a data entry clerk with a company, then the company would have to pay me salary. If I were to quit from my job as an employee of that company, the company would stop paying me salary.
Another cashflow quadrant that derives active income is the self-employed or small business owner. For instance, I could be a doctor with my own personal clinic. If I were to be away from my clinic, it could not function as a clinic because there is no doctor around. Since there is no doctor around, then I would not have any income from my clinic.
Passive income on the other hand does not require me to work actively for it. I can build a business that can run on its own. Even when I am not around, the business will run because there is a system.
For example, I could build a multi-level marketing business. Even if I were to go on leave for a while, the business would keep running because there is a system in place. The business would not die off just because I was away. The system would take over to make sure that the business run on its own.
To qualify for the commissions from the sales by my sales team, I need to make sure that I had done my part to meet my own sales quota. Meeting my own sales quota would be very minimum work. If my sales team had meet the sales quota, then I would be able to earn commissions from my sales team as well as the commission from my own sales. In this sense, I would be deriving passive income as a business owner.
Alternatively, I can invest in an asset that generates passive income. I can basically leave it running on it own with little or no intervention on my part. For example, I could invest in a property and rent it out. The only task that I need to do is just to collect rental income. In other words, I would be deriving passive income as an investor.
If I want to become rich, I need to switch from active income earner to passive income earner based on my understanding from the book Rich Dad Poor Dad by Robert Kiyosaki. That is I have to choose to become either a business owner or an investor.
Before I decide what to choose, I think it is best for me to understand more about the roles of a business owner or investor. I could have started off learning more about the role as a business owner. But it just happened that I began learning more about the role as an investor instead.
I began my learning as an investor using shares as a vehicle. When I started to learn about investment in shares, the first question that puzzled me is what is the difference between a gambler and investor? To me, a gambler buys shares to earn money. Similarly an investor buys shares to earn money. So does that mean an investor is a gambler as well?
To answer that, I need to think like a gambler. A gambler buys shares hoping that the shares price will go up so that he will make money. His decision to buy is neither based on technical analysis of the share price nor fundamental analysis of the company. He may have heard a rumor or he has listen to an advice from someone. But he does not verify these things. He just bet on it and hope to be lucky.
What about an investor? How will he go about doing things? This is what I have learned about professional investor or trader that trade shares for a living.
Firstly, a professional trader has a set of rules to follow. This set of rules is based on either technical analysis or fundamental analysis that increases the probability of a correct investment. The decision to invest is purely based on this set of rules. It is not based on groundless things like rumors or advice from unreliable source.
Secondly, a professional trader has a plan for the investment. He plans for winning as well as losing. If his investment decision is right, the share price will go up. He will sell off his shares when the targeted price is met. If his investment decision is wrong, the share price will drop. He will sell off his shares to reduce his loss when the price hit the stop loss limit. The stop loss limit is determined by the amount of money that he is willing to lose for this investment.
The reason that a professional trader can make money is because he has a plan and a set of rules to increase his odds of making money. In the case of a gambler, he has neither. Thus, the gambler is likely to lose money to the market where a professional trader is likely to make money from the market.
In conclusion, I felt that an investor is more than a gambler. If I want to be an investor in anything, I need to have a plan and a set of rules to increase my odds of making money just like a professional trader.
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The author only provides the material and information as a layperson’s views about an important subject. The materials and information are from sources believed to be reliable and from his own personal experience, but he neither implies nor intends any guarantee of accuracy.
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Max Ng shares about his struggle for financial freedom at http://www.richdadsecrets4me.comHe is the author of “Your Greatest Gift! Why Waste It?” at http://www.yourgreatestgift.com