7 Words You Must Understand To Become Financially Free

I’ve noticed there are words that I had to learn to start creating passive income and creating profitable businesses.

When I was an employee and living paycheck to paycheck, I didn’t understand these words or their significance.

Now that I work for myself, I meet people who are currently employees and find that they do not understand these words.

However, when they do, they get very very excited.

Because understanding these words are the first step towards financial freedom.

Word #1 Dividends

When you purchase a stock, you become a shareholder or part owner of the company.

If the company is profitable it may elect to pay some or all of it’s profits to the owners, hence they pay dividends.

We looked at a stock this morning that had a share price of $14.16 that paid $0.12 a month.

We were discussing this information in our Security Analysis Mastermind weekly zoom meeting (you can register for one of the last 4 free spots here), and one of our new members did not understand what a dividend was.

When he did understand it, he was very excited.

I think one of the reasons people don’t understand what dividends are is that most of their experience with stock investing is through automatic investing from their pay checks into mutual funds in their 401Ks or other retirement accounts.

Word #2 Passive Income

Passive income is money you make without working.

What you say?

When I started out I didn’t understand it either.

I thought you had to work for money.

It’s not true.

Some income is more passive than others.

Some only comes to you when you are alive.

Some will go on even after you die.

An example is if you are an actor in a movie.

When you act the movie you are paid active income.

After that, you start getting paid passive income in the form of royalties.

Depending on how popular the movie is, you might be getting royalties for a long time.

Word #3 Asset

An asset is something you own that puts money in your pocket.

For example, let’s say you bought that stock in the dividends section we mentioned above.

If it continues to be profitable and pays out the $0.12/month, then the stock is an asset because it is putting money in your pocket.

Word #4 Return on Investment

How do you figure out if your investment is a good one?

Well, the key is to understand the return on investment.

When you pay out money to invest in something (if you pay out money, you don’t have to), then how much are you going to get back in profits and increased value?

If you can figure it out how much you would get in value in a year, then you can calculate your Annual Return on Investment.

The nice thing about understanding your annual return on investment is that you can compare it to other investments to see how you are doing.

For example, the annual percentage yield on a savings account these days is 0.01%.

For more on actual examples of how to calculate ROI click here.

Word #5 Liability

A liability is something you own that takes money out of your pocket.

This is in contrast to an asset, which puts money in your pocket.

An example would be a car, you have to pay for gas, maintenance, safety checks, registration, etc.

Word #6 Depreciation

Ah depreciation.

It’s this invisible expense that you can use to reduce your income and hence your taxes.

It shows up when you have business equipment that you buy, or a property that you buy.

You can take the cost of what you bought, and divide it by 20 (or whatever number your accountant says is the current number), and then use it as an expense.

With depreciation, net rental income could become zero or negative, without you paying anything.

The effective result might be that you make tax-free income.

Word #7 Business Pass Through Income

I first understood this when I started my first business, an internet business.

I paid for start up costs and started selling things online.

When I did my taxes that year, I found out that my losses passed through to my regular job income, and I ended up getting back thousands of dollars in a tax refund.

Why did that happen?

Because the business income/losses passed through to my personal income tax return.