To become a successful Financial Slacker, and progress along the path to financial independence, the one thing we all need is income. We like our houses, we like our cars, we like our electronic gadgets. We go out with friends and take vacations. We have kids and private school. We need a way to fund these items and creating a lasting source of income is the answer.
We cannot ignore expense management, but cutting expense is only part of the solution. Maximizing our income is the priority in this article.
Not all sources of income are equal. Some are more traditional. Some are more stable. But in the end, we must figure out a way to generate income.
First, let’s discuss the three general ways you can earn income:
Sell your time
This is a typical job working for someone or some company. Either you get paid by the hour, by the week, every two weeks, every month, etc. But essentially you get paid for a specific amount of time. You might also get a little kicker for performance (either yours or the company’s) in the form of a bonus or commission or profit share.
This is how the majority of people earn a living. But unless you have a pretty specialized skill and are in high demand (i.e., CEO, investment banker, celebrity, professional athlete), there is a limit to how much you can earn selling your time.
In order to accumulate significant wealth selling your time, you will need (1) a high dollar per hour rate, (2) relatively modest living expenses, and/or (3) a significant amount of time.
In addition to the time factor required to build wealth, when all your income is dependent on a single day job (or any single source), you run the risk of losing all your income at once – i.e., if you get laid off.
Build a business
This category differs from those who are independent contractors or consultants. Those I would include up above as you are still selling your time for money. Whereas, building a business may in fact create a “selling your time” job, but it usually also includes profit generated from the activities of others. This can be a great way to generate wealth.
Related: How to Start a Business
This last category would typically follow the other two as you need another source of income in order to have funds to invest to generate investment income. But getting to the investing level is the best way to generate wealth. So whether the investment is a closely-held business, or a stock portfolio, or real estate properties, these are all assets that will generate capital gains and/or investment income above and beyond simply selling your time.
Passive vs Active Income
On most personal finance blogs, you will often hear much discussion on the topic of passive income. I really don’t believe there is much available in the way of truly passive income. Most recurring income streams (unless you have inherited a trust fund) will require work, planning, and maintenance.
But, the difference between passive income and active income is the correlation of your time to the amount of money you make. Passive income sources often require more upfront work during which time you will not be making much. But the trade-off is that once established, passive income sources tend to continue making money without much active involvement.
Sources of income ranked by level of passiveness:
- Financial investments
- Real estate assets
- Lifestyle business
- Day job
Now that we’ve discussed the different sources of income and expense management, we need to focus on investing our savings which is the key to creating wealth.