The reasons are several and include:
- Money made selling your time (salary and wages) is often taxed at far higher rates than the other types of income as discussed extensively in Your Biggest Investment Enemy - The Payroll Tax and All Income Is Not Created Equally. The reality is, if you can make $5,000 in dividend income, you are likely to pay only $750 in taxes, whereas if you were a self-employed plumber and went out and earned $5,000 through hard work, after payroll taxes, Federal taxes, State taxes, and other charges, you would likely end up paying more than $2,000.
- There are only twenty-four hours in a day. Thus, you can only work so many hours. At some point, it becomes physically impossible to sell more of your time because, well, you ran out of time! You can always increase the rate you earn by developing rarer skills that are in high demand, as we already discussed. With interest, dividend, and capital gains, there are virtually no limits to how much you can earn. If each year, you pile your money back into growing these sources, you can find yourself earning millions of dollars each year a few decades from now.
