) Income taxes are then calculated on top of social insurance taxes. Passive and port- folio income are not subject to social insurance taxes. "So every day that I get up and focus on working hard to earn money, I am focusing on earned income, which means I pay more in taxes," I would say. "That is why you have been encouraging me to change my focus on what kind of income I want to earn." I realized rich dad was back to Lesson # 1 of Rich Dad Poor Dad. "The rich don't work hard for money. They have their money work hard for them." It suddenly all made sense. I needed to learn how to convert earned income into passive and portfolio income so my money could start working for me. The Investor Controls Possessed by the Sophisticated Investor 1. The control over yourself 2. The control over income/expense and asset/liability ratios 4. The control over taxes 5. The control over when you buy and when you sell 6. The control over brokerage transactions 7. The control over the E-T-C (entity, timing, character- istic) The Three E's Possessed by the Sophisticated Investor 1. Education 2. Experience 3. Excessive cash 274 Rich Dad's Guide to Investing Sharon's Notes The SEC test of a "sophisticated investor" is a non-accred- ited investor who either alone or with his purchasing rep- resentative has enough knowledge and experience in financial and business matters to be able to evaluate the merits and risks of the prospective investment. The SEC presumes that accredited investors (as defined earlier as the well-to-do, who can afford to hire advisors) are capable of watching out for their own interests. In contrast, we believe many accredited and qualified in- vestors are not sophisticated. Many wealthy individuals have not learned the basics of investing and the law. Many of them rely on investment advisors whom they hope are sophisticated investors to do the investing for them. Our sophisticated investor understands the impact and ad- vantages of the law and has structured his or her invest- ment portfolio to take maximum advantage of entity selection, timing, and characteristic of income. In doing so, the sophisticated investor has sought the advice of his or her legal and tax counsel. Many sophisticated investors are often content investing in other entities as outside investors. They may not possess control over the management of their investments, which distinguishes them from the inside investor. They may in- vest in management teams without possessing a control- ling interest in the company. Alternatively, they may invest as partners in real estate syndications or as shareholders in large corporations. They study and invest prudently but lack control over the management of the underlying asset and therefore have access only to public information of the company's operations. This lack of management con- The Sophisticated Investor 275 trol is the defining difference between a sophisticated in- vestor and an inside investor.