PART III: Achieving Financial Success
By now, if you’ve read our previous introductory articles, you should have a good understanding of the various types of investors and the various types of income available to those investors. And let me be the first to point out that investors of all types have become rich investing in all kinds of things. What might be right for one person may not be right for another.
But, that said, if you look at the majority of successful investors in the world, the bulk of them have traveled a similar road, and have achieved financial success via a common set of investing philosophies. Let’s review the types of investors and the types of income once more to clarify the pros and cons of each…
First, in terms of investor types, we have the Savers. Savers primarily use time to achieve their financial goals. The big detriment to the Saver philosophy of investing is that it becomes very difficult to achieve your financial goals in anything but long periods of time; because Savers rely on low but consistent rates of return, they plod along for many years before hitting their goals.
Speculators understand that there is another variable – other than time – when it comes to investing: Rate of Return. They use this information to their advantage by creating investing opportunities with higher rates of return, which they expect will allow them to achieve their financial goals in much shorter timeframes than their Saver counterparts. Unfortunately, Speculators rely on excitement and frenetic activity to fuel their investing, and often make uneducated and rash decisions that negatively impact their monetary gains.
Lastly, we have the Specialists. They strive to achieve the benefits of both the Savers (consistent returns) and the Speculators (higher returns), without the associated risks (long time horizons and highly fluctuating returns). While almost anyone has the ability to become a Specialist investor, the key to this type of investing is education; Specialists work hard to learn the ins and outs of their chosen area(s) of investing, and leverage that hard work to succeed.
In terms of income types, we start with Earned Income. Earned Income is generated by working a job – whether that job is salaried, hourly, consulting, or any other work related activity that is paid based on output. Earned income has the obvious advantage that it’s the only type of income that doesn’t require an upfront investment (other than time) to make money. The downside is that the amount of Earned Income you can make is limited by the amount of time you are willing/able to invest and once you stop working, you stop making money.
The other two income types – Portfolio Income and Passive Income – each provide returns potentially independent of time invested, giving them a huge advantage over Earned Income. While there are a lot of nuances between Portfolio and Passive Income (that we’ll cover more in depth in other Three Types articles), the major drawback to each is the fact that they generally require upfront monetary investment before they can generate any financial return.
So, what’s the path to financial success?
It should be clear that in terms of investor style, being a Specialist is the best way to optimize for consistently large returns, which will ultimately lead to financial independence in the shortest period of time. Of course, as mentioned above, becoming a Specialist investor takes time and study, but anyone willing to invest the time and effort can become a wildly successful investor.
So, now that you know being a Specialist investor is the path to financial success, what types of income do Specialist investors pursue?
Specialist investors realize that all three types of income are vital to achieving financial independence. Earned Income is vital to those who are starting with nothing (or in debt), to help eradicate debt and start building seed capital. Once some seed capital is available, Specialist investors use Portfolio Income and Passive Income to rapidly grow their capital and begin to generate recurring cash flow that can be continually reinvested. Finally, Specialist investors use Passive income investments to generate recurring income to support them when they are ready to “retire” from their investing activities.
Our goal at ThreeTypes.com is to provide the information necessary to help you become a Specialist Investor and learn to use Earned, Portfolio, and Passive Income to meet and exceed your financial dreams.