This is probably gonna be the most interesting portion of the book for many of us simply because no matter how rich or how poor a person may be, somehow the ability to be able to earn a decent or good income is a vital part of the American Dream – and rightly so. I realize that talking plainly about making money seems very blasé` to some because we’ve been taught that money isn’t everything and is really not that important. While I agree that money isn’t everything, I also agree with King Solomon when he said, “money answereth all things.” Money cannot buy all things, but it can buy most things and is very important to have in the society in which we live. Moreover, our intelligence concerning making money, keeping money, and handling money has a major impact on our happiness. You ain’t gotta say, “Amen,” but it’s true anyhow.

The people that say that money doesn’t make you feel good haven’t had any because you do feel better when you’ve got some versus when you have none. We’re healthier and happier when we can pay the mortgage on time and don’t have to be stressing about where the money’s coming from. We feel great when we can buy groceries and provide for our children and pay for them to have the very best education. I don’t know about you, but that “feels” good to me and I understand that it takes more than money to have JOY, but I’ve also come to realize that money along with JOY is a beautiful thing.

Poor people are quick to boast that they have JOY as if to suggest that JOY and money somehow aren’t a perfect fit. I submit to you that they are and we need to work at learning better and more efficient ways to earn money and more of it. The better we get at this, we’ll undoubtedly find that the better our quality of lives will ultimately become. Money may not be everything and it may not bring JOY, but neither does being broke, working 12 hour days and two and three jobs – and not being able to spend quality time with our families.

With the constant downsizing of corporate America and strategic outsourcing of jobs to foreign nations, we can no longer depend upon the advice and mindset so firmly instilled in all of us by our parents, teachers, and mentors. We were taught from the time we were in kindergarten that we were to study hard, get a good education – which included high school and college (maybe even law or medical school) – and get a good job. We are finding out more and more everyday as we live in the 21st century that this is a flawed mentality and not nearly as reliable as it once was. We find ourselves still living by the prevalent concepts that reigned for much of the 80’s and early 90’s, but are proven – at the very least – much less effective in the times that we now live in.

The truth is that in this information age, the expectation of landing a high paying corporate level job, working for 30 years, and retiring with a nice pension is not something that we can hang our hats on anymore. I apologize, but it is just not realistic in the world that we live in today. The days of depending upon corporate giants and others is a thing of the past and whether we want to openly admit it or not, most of us know of certainty that I am exactly right. And it used to be that the blue collar workers were safe and could always depend upon the automobile manufacturing companies to provide stable jobs. After all, it made plenty of sense that automobiles weren’t going any place so there would always be jobs there. Nevertheless, the closing of many of these manufacturing plants right in our backyards were sobering eye openers of just how drastic our economy and world has changed as it relates to how companies do business.

I have heard stories of co-workers going to work, after 20 years on the job, with their fingers crossed and afraid to check their mail boxes for fear of discovering a pink slip therein. How does a grown man deal with that being 45 years old and having committed to a company all those years, only to realize he was just a number and all of a sudden has to start all over? What does he tell his wife and children at home? I have heard of instances where grown men, after receiving their lay-off notices at work, fall to their knees and weep in despair not even caring that their coworkers are watching because their world was now shattered. And those who witnessed these occurrences knew that the next day or month that could very well be there own reality.

Corporate America has changed dramatically, but our philosophies have not done so at the rate of the industries that we serve. And we do our children a disservice by not quickly adapting and educating them in what we see happening right before our very eyes. It seems that we are in a daze – in denial even. Snap out of it America! Things are not going back to the way they were and simply “a hoping and a wishing and a praying” is not gonna change that – I’m sorry! We are pretending that the inevitable is not at hand. Just because we don’t have any easy answers, doesn’t justify delaying action and acknowledgement of our dilemma. We don’t know what to do ourselves and therefore are at an even more loss for words of advice for our children – other than the false hope of conventional wisdom that we’ve been preaching to them for the past 15 to 20 years.

We need to be honest with ourselves first and accept the fact that we cannot depend on companies to provide us with “good jobs” and pensions. This is not a sound financial strategy. When our employers are constantly offering us attractive early retirement packages, we have the audacity to brag about it as if we do not understand that what they are actually doing is trying to FIRE us! Come on, Homes! Read between the lines – they call themselves attempting to be cordial with us in hopes that we will take a hint and bow out gracefully. When fortune 500 companies, banks, and manufacturing companies offer us these sweet deals, they are really saying “Get your hat and coat – it’s time to move on.” But we won’t go! Some of us really don’t get it. This is not meant to be taken as a compliment.

Many, after having read this chapter are gonna wake up and realize for the first time that they have been being prepped for firing for months now and didn’t have a clue about it. For those of us who still don’t get it, let me deliver you and tell you what your friends, family members, and executives on the job are afraid to tell you – THEY ARE TRYING TO FIRE YOU!

Many of us are well aware of these realities and are not delusional as the previous example, but are just as bad off because we won’t take appropriate action now to lighten the blow. We know we are gonna crash or run off the cliff shortly and we have “some” time, but we won’t pump the brakes, look for a detour, nor even brace for impact. I say at least let the passenger on the other side know what’s going on so they can make an intelligent decision about their own financial demise – let’s at least let our children know what’s up ahead. Remember, all they know about what is up there is what we’ve been constantly telling them for the past 10 to 15 years, which has proven to be false.

Conditions have drastically changed. There is danger ahead! Let’s not be so full of pride that we cannot admit that we misjudged and that we now have to rethink things and perhaps abandon altogether the plan that we devised previously. I mean, we do love our children don’t we? Certainly we wouldn’t knowingly lead them down a wrong path or fail to avert actions and mindsets that we know will, more than likely, lead to financial disappointment and ruin. We have to level with them and tell them the truth.

Statistics show that a whopping 75% of graduates do not end up with careers in their field of study. However, most do manage to end up with $50K to $100k in student loan debt in the process. Something is wrong with this picture, but we’d rather keep pretending rather than face reality.

Have we stopped to consider that while salaries are indexed to increase by a mere 3% per year, inflation is more than double that amount? Gas, food, and utilities are rising by double digits. We’re on a tread mill here Guys, and somebody keeps turning up the speed – and we just can’t manage to keep up.

It goes without saying that this 21st century dilemma that we face regarding the job market is not limited to African Americans. Therefore, we are not speaking here of a Black or White issue, but an American one – it’s pure economics. So Blacks cannot claim as an excuse that the markets or industries have changed on us because the reality is that they have changed on everyone alike. In fact, Whites with the better class and higher paying jobs are hit harder – as you know the old saying, “the higher you are, the greater your fall.”

What do those high level executives earning $250,000.00 per year or more do when suddenly the rug is pulled out from under them, after working their way to the top for 10 to 20 years? Yeah, I know they made a lot of money and you’d think they’d have some put away, but they are just like everyone else – consuming it at the same rate they were earning it. Therefore, with a $5,000.00 mortgage note and hefty automobile payments, in addition to country club membership, they’ve seen a bad day.

The key to it all, I’m convinced, is financial literacy. We have to understand money and finances and how they work. It is important that we explore the different methods of producing income. Throughout the years and our generations, we have only been taught one of those methods and it just so happens that it is the least efficient of them all. But hey, it’s all that many of us have ever known.

There are four (4) fundamental methods of producing income that I want to address – Linear Income, Residual Income, Passive Income, and Portfolio Income. I submit to everyone under the sound of my voice that we should be educated on and understand these concepts prior to setting goals and making final decisions about what areas of study and professions to embark upon. While I do agree that we should follow our passions and do what we love, I also believe that once we first come to understand the power of these principles and begin to plug in various professions to discover which categories they fall in, we may find that we will grow to love something else. Or at the very least, we may decide to earn income totally separate from our life’s passion. It may be that this strategic decision will enable us to do that work more effectively and on a much greater scale as a result. A lot of times we assume that the two are automatically entwined only to learn that many times doing our life’s passion doesn’t pay the bills very well. See how deranged our thinking can be? We’ve only been taught one way.

Let’s look at Linear Income. The concept of earning Linear Income is our favorite – in fact, it’s the only one that we know and were taught. Linear Income is income that is generated by performing a given task once and getting paid for it once. That is the contract – that is the arrangement – that’s the deal and everybody understands and agrees to it. On a regular job, we work for an hour and get paid for the hour that we worked. If we work 8 hours, that’s what we expect to get paid for – no more, no less.

A perceived value is attributed by both sides to the work that is performed and regardless of the future benefit or appreciation in value of that work to the employer, the employee basically settles in full for the wage paid. The employer on the other hand gets the immediate benefit of the work performed along with the expectation that the work will ultimately yield increase beyond just that moment it was enacted.

With Linear Income, the recipient thereof is almost guaranteed to always get the short end of the stick. And they are supposed to. Everybody knows that the investor or the guy or company that’s taking all the risk should be the recipient of the greatest reward. It’s a fundamental principle that is accepted by all – it’s a given. Nobody argues with that, as it is only right.

A great employee who is a customer service representative or concierge at a Five Star hotel in metro Atlanta is very professional and personable in her interaction with elite guests. Patrons are charged a hefty $400.00 per night for accommodations. The concierge gets paid a decent $12.00 an hour to meet, greet, and serve the needs of their guests daily. She is so personable that the patrons of the hotel choose to come back to the hotel over and over again because of her and also refer other business colleagues who also begin to frequent the hotel. They go on to have annual banquets and meetings there as well – all because of the impeccable service rendered by this concierge. It has literally translated into millions of dollars in additional business over a short 2 year period as repeat and referral business had snow balled.

This is fantastic for the hotel, but catastrophic for the concierge even though she does not know it. The concierge is very content with her wages and doesn’t appear to even notice the effect she is having financially on the hotel’s bottom line. All she knows is that she signed up for $12.00 an hour or Linear Income and that the hotel has kept its end of the bargain for the past two years. She is well aware that she is doing a fantastic job and as a result, she was properly rewarded by receiving a dollar an hour raise twice – for that she was grateful. She worked an hour and got paid an agreed upon amount for each hour of work performed.

The concierge got her pay and the hotel received the benefit for the work performed and kept all the value left over. When the concierge clocked out each day, her expectation of pay ceased, yet the hotel’s cash register was still ringing because of the work she performed. In fact, the concierge could quit or get fired and chances are the hotel would still benefit for years to come off of the referrals and repeat business that she generated. This is the problem with producing Linear Income. A valued employee performs a task once and can only hope to receive pay for it once, despite the fact that the employer will get paid over and over for that task.

The flawed concept of working for Linear Income doesn’t really hit home until we consider the fact that our gas bill runs 24 hours a day. It doesn’t dawn on us until we consider the fact that we stop working at 5:00 p.m., but our bills run around the clock. You see we didn’t even realize how much trouble we were actually in before now. When we look at it from this prospective, we realize that somehow, someway we have got to figure out how to make money while we’re asleep, just to keep up with the bills!

Now let’s take a look at RESIDUAL INCOME. Just the term alone sounds like it’s better than Linear Income. Residual income is a concept that poor people often go through life and never even hear about, let alone partake or be trained in. It is the wealthy man’s best kept secret and the very key to establishing empires and financial dominance. It is absolutely appalling to me and should be to you as well that this fundamental wealth principle is not taught in school – and I mean elementary school as well as high school.

The concept of earning residual income is simply performing a task once and getting paid for it over and over again. This principle is so elementary, yet so foreign to 95% of Americans. That’s why only 5% of the nation’s population has 95% of the nation’s wealth. The 5% are the wealthy and they all operate proficiently in this simple principle and they do it on purpose. Many of us, on the other hand are totally ignorant of what’s going on and even when opportunities are presented to us which involve residual income, we run from them as the concepts are so alien to us. We turn down flat opportunities to get involved with producing residual and passive income but will swim across oceans for a job opportunity. This is pitiful!

I have heard many refer to these opportunities as too good to be true while at the same time, we see our employers and the affluent reap the benefits of them every single day. We witness the results of residual income every time we go to work and many of us regularly create it for our bosses on a daily basis. The sad part of it all is that we don’t even understand the magnitude of what an amazing vehicle we are creating. So naturally it is highly unlikely that we would ever think to create any of it for ourselves or even figure out a way to get paid for it beyond just the present. All we know is we work an hour and get paid for that hour we worked without giving any thought whatsoever whether or not that hour worked pays our employer a dividend beyond what was evident.

Again, ignorance is not a virtue, but employers appreciate it in their employees. They laugh as we are on pins and needles when trying to muster up the nerve to ask them for a dollar an hour raise. They marvel at how ignorant many employees are concerning their true value to the company. It amazes them in discovering how eager workers are to labor so diligently for “peanuts,” not being intelligent enough to even inquire about residuals for their work.

A good example of residual income is an independent insurance agent who goes out and lands a modest insurance policy on a potential client. He takes the time to drive out to the client’s home to meet him and his wife. They agree to a 10 year $50,000.00 whole life policy where the annual premium is $1,900.00. The agent spends about 2 hours with the client and writes the policy collecting the first monthly premium payment in advance of $158.34. The agent’s payable commission on the policy is $475.00 a year or $39.58 per month, as this client has elected to pay in installments.

Therefore, the insurance agent in this case is in the business of creating residual income by performing a task once, but getting paid for it over and over again. He performed a 2 hour task and will get paid $475.00 a year for the next 10 years never having to even speak to that client again. That is, until it is time to renew – at such time, he’ll simply put the process in motion all over again.

Let’s do the mathematics here. If this insurance agent wants to earn $75,000.00 per year, which is about the average salary of the average corporate level employee, he would only need to acquire 158 or so clients who would agree to purchase a similar 10 year $50,000.00 whole life insurance policy. The math is simple: Just take $75,000.00 (desired earnings) and divide it by the annual commission paid per client ($475.00).

So let’s get this straight. The corporate worker is trained to go to college, get a 4 year degree in business, go on to get his masters, and get a good job in corporate America. He’ll probably start out with $65,000.00 and in about 5 years, hit the glass ceiling of $75,000.00, and hope they will keep him on for the next 30 years and he can afford to retire. Mind you, he has no real job security whatsoever and can be laid off or replaced at the drop of a hat. He is stressed everyday with deadlines to meet and works 10 hour days to meet them. The corporation tells him when he can go on vacation, how long he and his family can stay, and even tells him how many days he can be sick each year. He has to beg his boss to allow him to attend his child’s school programs and is very rarely able to make it to his son’s little league baseball games.

Wait a minute – are we talking about a grown man here? You mean this guy creates residual income for the corporation, but has personally agreed to accept a month’s pay for a month’s labor and has to ask his boss if he can go to his daughter’s Dance Recital? Really?

The insurance agent, however, does not have a college degree, nor does he boast a Masters. Yet, he simply sets out to land 158 clients that he can convince to purchase a measly 10 year $50,000.00 whole life policy (which I oppose because they are overpriced and a poor value) in a year’s time. To accomplish this, all the agent has to do is land 13 clients under these circumstances per month (158 clients divided by 12mos) and he has just created a $75,000.00 annual income that is residual for the next 10 years. Once this is accomplished, he doesn’t have to meet a schedule everyday at work. He doesn’t have the stress of meeting all those unrealistic deadlines. He can go on vacation with his family whenever he wants and stay gone as long as he can afford to. And, oh, he has the liberty to be sick (although I strongly discourage this aspiration) as many days out of the year as he pleases. He can proudly be apart of his kids’ first day of school and other programs, and make all of the little league games. He can do this for the next 10 years as his income is absolute and virtually recession-proof. This sounds like a fairy tale doesn’t it? Almost even too good to be true – but we all are beginning to get the picture now.

The moral of the story is this – although the insurance agent was uneducated by society’s standards, he understood the valuable concept of residual income. He was financially literate when the corporate guy was just the opposite. He was well educated by all accounts and highly esteemed as a great intellectual, but financial ignorance caused him to subscribe to the wrong method of long term income production. The uneducated insurance agent’s motto was this; “Don’t know much about history; don’t know much biology – but I do have better since than to practice trading time for dollars by producing Linear Income.”

Of course, I am in no way suggesting that anyone who works for a corporation is an idiot. My point is that if they were better informed about the four income producing methods, they might decide that it would be more beneficial to choose more efficient means of earning income. Or, after being educated in these fundamental principles they may decide to take the income they earn from the linear method and invest in residual or passive vehicles.

So once again, for the skeptics and critics, I am in no way advocating against a formal education. I am all for it – after all, I have a law degree myself and am very proud of it. And I am in no wise teaching against working a corporate job, although I am against relying heavily on it alone as a person’s only plan for financial independence. It can certainly serve as a tool that will enable one to tap into the latter two. Besides, what are we gonna do with these degrees, throw them away? Absolutely not! We simply need to change the way we look at income production and wealth building and train our children accordingly.

Next, we have Passive Income. Much like residual income, passive income is a much smarter way to produce income and more efficient than linear. The IRS defines passive income as any activity that a person or entity produces in which the tax payer does not materially participate. Another definition is, “income derived from real estate and business investments in which the individual is not actively involved.” In short, it’s simply getting paid for what someone else does. Isn’t that phenomenal? In this case, it’s not necessarily our business – more often than not it is someone else’s, which means they do all the hard work, manage the overhead and employees, and we just get paid every month. Passive income does not include earnings from wages or active business participation.

Wait a minute! That doesn’t seem fair. It almost sounds too good to be true. But I assure you it is true and these opportunities are all around us every single day and are accessible. The problem we have is that we have been programmed to only seek income from one source, which is the most labor intensive. The rich, however, rarely ever derive income linearly. In fact, they detest it and reject it. It’s like a bad word – a sin, even. They’d much rather work for free and donate the time than to lead some company to falsely believe that it could actually pay them wages once for a task, that would pay the employer over and over again. They’d rather volunteer first as many often do. It’s just a different mindset altogether and we’d be wise to adopt it. But many of us choose to simply pass over these lucrative opportunities to produce residual and passive income instead of seeking them out and capitalizing upon them.

There is an acronym for the word poor that I have found to be so true. P.O.O.R – PASSING OVER OPPORTUNITIES REPEATEDLY !!

A good example of passive income is the guy who owns rental real estate. This guy buys a single family home that was sold under foreclosure for $25,000.00 with an after repair value of $110,000.00. Don’t think that’s unrealistic because there are cities across the country that you can buy brick houses at this price, and all day long – I have a close business partner that does it every day. The investor spends another $10,000.00 in renovations getting the property ready to rent. After doing a market analysis on the rental market in the local area and neighborhood, he finds that $850.00 in monthly rent is adequate. Because he has great credit and so much equity, he is able to secure 100% financing for both the purchase as well as the rehab, which means he will have no money out of pocket in the deal.

Anyway, the $35,000.00 note requires a monthly repayment amount with principle, interest, and escrow of only $250.00 a month. You do the math. This simple transaction yields the investor positive cash flow of $600.00 per month every single month for the next 15 years or more. That’s $7,200.00 per year without getting out of the bed.

But that’s not the half of it. This guy goes out over a 12 month period and buys 6 more homes around the same price range and once again, rents them all out for the same amount. Now simple arithmetic will confirm that just by making these strategic moves in real estate, the investor has just created $36,000.00 in annual income or $3,600.00 a month – and doesn’t have to get out of the bed. What’s more, the tenants in each of the properties are effectively paying off the five houses for the investor! I know, sounds too good to be true right? Remember, the total rent is $850.00 so the $250.00 is going toward the principle and interest, which means the note will be paid off in full one day.

Well, for the skeptics and critics, this method of creating passive income is a personal favorite of one my closest business partners. I have been fortunate enough to witness him purchase many investment homes ranging from 1,200 to 2,200 square feet for as little as $20,000.00, put anywhere from $5,000.00 to $20,000.00 in renovations in the projects, and enjoy rental income of $750.00 to $850.00 per month per unit. Trust me, it works like clock work. It is really not difficult at all to do and absolutely everyone should do it. Well not everyone – after all somebody’s gotta pay rent, right? Yeah, somebody does, but it doesn’t have to be us. Every American should own at least one rental property besides their primary and secondary homes.

Do you realize how many people work and struggle everyday and earn LESS than $36,000.00 per year? Are you kidding me? It’s simply because we have been taught to produce income only one way – and that’s the hard way.

Finally, we have come to Portfolio Income. This method of income is generated from investments, stocks, mutual funds, interest, royalties, I.O.U’s, dividends, and capital gains. Here again, these vehicles require no labor whatsoever. With portfolio income, we simply invest a sum of cash and realize a return on the dollar amount invested.

Let’s assume we have $10,000.00 to invest and we choose to invest it in a mutual fund which has been averaging over the last 10 years about 15% a year in earnings. Once again, simple mathematics discloses that our $10,000.00 will earn us the sum of $1,500.00 in interest for the year, thus turning the initial $10,000.00 into $11,500.00 or $125.00 per month in income.

Listen Folks, for those of us who may not have a lot of money to invest, this is our problem. We look at millionaires who invest the big money such as a million bucks under the same terms and earn $150,000.00 (15%) and turn our noses up at earning only $1,500.00. But we are missing the principle which works on every level from a mere $10.00 all the way up to $10,000,000.00. We have to learn to not despise the days of small beginnings and start to work principles at the stage we are now. Remember, principles are universal and work on every level.

Also, with portfolio income, the investor gets to enjoy a powerful vehicle in wealth building known as compounding interest. Compounding interest is the principle of adding accumulated interest back to the principle amount and enjoying the benefit of earning interest on the combined amount (the interest earned plus the original principle invested). Compounding interest is a rich man’s best friend, but the poor man’s worst enemy simply because he is on the wrong side of the equation.

Let’s go back to the example of the $10,000.00 that we have available for investing. Again, our principle amount is $10,000.00. We have found an investment instrument that will yield us 15% APR. This percentage is about the average rate of return that one could reasonably expect to receive from investing in a very good, aggressive growth mutual fund. We all know that 15% of $10,000.00 is $1,500.00. Now what many of us would like to do as soon as we get our hands on $1,500.00 is, of course, “consume” it or deplete it. But keep in mind we have grown beyond that as we have embraced the financial mindset and wealth principles of this book.

Instead of consuming, depleting, or using it up completely, investors who understand the power of compounding interest know that it is in their best “interest” to reinvest the amount earned along with the original principal. Thus, the next year (could be the next month depending on the compounding frequency) instead of starting out with the original $10,000.00 , we’d be starting out with $11,500.00. And it doesn’t take a mathematician to figure that interest applied to $11,500.00 is gonna yield a better payday than if we only invested the original $10,000.00. There’s no rocket science here. We’re still dealing with arithmetic and that’s great because once we get beyond that, we’re veering beyond my pay grade. Don’t laugh because I know people who are proficient in calculus but their broke!

If we took the principle amount of $10,000.00 at 15% and elected to extract the 15% each year for a period of 5 years, we would have earned $7,500.00 over 5 years ($1,500 X 5). However, if we reinvested the interest that was earned each year and added to that amount the principle, the amount of interest earned would be $10,113.57. That’s an amazing $2,613.57 more or over 26% more than our original principle amount invested. If we elected to merely extract and hold the $1,500.00 earned each year at the end of 5 years we’d have a total of $17,500.00. Not bad, right? However, employing the mechanism of compounding interest we would end up with $20,113.57 which is a great deal better. As a general rule, we can always double our money every 5 years with compound interest if the average APR is 15%. The key here is the 15% rate combined with compounding interest. We should always strive to achieve both.

Rule 72 is the rule by which an investor can determine how many years it would take to double his principle at a specified interest rate, utilizing the power of compound interest. Simply divide the interest rate you expect to receive annually by the number 72. For example, if you expect to earn 15% annually, you’d simply divide 72 by 15 which would disclose that it would take about 4.8 years to double your principle ( 72 divided by 15 = 4.8years). Keep in mind though, that this is just a rough estimate. The rule 72 gets less precise as the rate of return becomes higher. Anybody who has any hope of amassing any real wealth has to begin to understand these fundamental financial principles.