Three Types of Income
Classify income by how it is earned before optimizing it
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 5
- Confidence
- 90%
The model separates money received into earned, portfolio, and passive income so that financial decisions begin with structure rather than a single headline number. Earned income comes from work, portfolio income comes from financial assets, and passive income continues with less direct labor. The useful mechanism is classification: list each source, determine how dependent it is on ongoing work, examine the applicable tax treatment, and identify where one type dominates. Kiyosaki argues that schools prepare people mainly for earned income and that this category faces the highest taxes. Whether that claim applies depends on jurisdiction and circumstances, but the reusable framework remains valuable: different income sources carry different effort, risk, and tax profiles, so a financial plan should evaluate the mix rather than merely pursue more gross income.
Origin
Kiyosaki introduces the three income categories while contrasting conventional employment education with entrepreneurial financial education on Young and Profiting.
Core principles
- 01Income sources are not economically identical
- 02Classification should precede optimization
- 03Taxes and labor dependence affect useful income
- 04Cash flow matters more than status labels
How to run it
- 1
Inventory income
List every recurring and occasional source of income before tax. Keep sources separate rather than combining them into one total.
- 2
Classify each source
Place each source under earned, portfolio, or passive income according to what produces it. Note ambiguous cases for professional review.
Pro tip Classify the underlying mechanism, not the label used to market it.
- 3
Assess dependence
Estimate how quickly each source stops if your labor stops. Also record volatility and capital at risk.
Watch out Passive does not mean risk-free or effort-free.
- 4
Check tax treatment
Verify how each source is taxed in your jurisdiction and entity structure. Compare after-tax results rather than gross figures alone.
Pro tip Use a qualified tax adviser for consequential decisions.
Watch out Do not rely on generalized tax claims from another country.
- 5
Improve the mix
Choose a bounded action that reduces unwanted concentration or labor dependence. Review the classification periodically as sources change.
In the wild
A founder separates salary from consulting, dividends from a diversified fund, and royalties from a licensed training asset. She then compares labor dependence, volatility, and verified tax treatment instead of calling all three simply income.
→ She can see which source creates the greatest concentration and where diversification would help.
Common mistakes
Comparing gross income only
Two sources with equal gross value can have different effort, risk, and tax consequences.
Calling speculation passive
A label does not remove volatility, capital risk, or the attention required to manage an asset.
Is it for you?
Best for
It is best for earners and founders reviewing the structure and resilience of their income.
Not ideal for
It is not ideal as a substitute for jurisdiction-specific tax or investment advice.
From the transcript
“there's three types of money there's earned income portfolio income and passive income”
“they're working for earned income highest taxed”
From the episode
Robert Kiyosaki: Rich Dad Poor Dad, These Common Beliefs Keep Hard-Working People Poor
Robert Kiyosaki