In this episode, Dawn gets into the nitty gritty about the difference between wages and profits. Don’t miss this episode if you want to improve your financial life!
Welcome to the SimpleMoney Podcast, where we make personal finance less intimidating. I’m Dawn Starks, a financial planner and lover of the simple life. I’m here to talk about money and simplicity. Let’s dive in. This is Episode 89: Profits are Better than Wages: Mailbox Money for the Win. How do you make your income? Do you earn it through wages or does it come to you via profits?
Recently, I was listening to an audio book while I was on the treadmill – because that’s one of my favorite things to do now – and this topic came up. And it was curious to me because the book was about ambition and concepts of that nature. And so this idea of profit versus wages kind of came up as an afterthought. It was not what the book was about.
So even though it was only just a couple of minutes worth of the audio book, it really got me to thinking. In the premise of the book, of the mention of it in the book, was this: that profit is superior to wages. And of course I agree with that, but what occurred to me was how people have very different mindsets when it comes to how they acquire their money.
So let’s talk about that a little bit. Let’s talk about profits and wages and why people might feel differently about one way versus the other. So first we should talk about some definitions about what we’re discussing. So first let’s talk about wages. Wages would constitute the money that you make when you’re working on a job while you’re employed by somebody else. So if you’re an hourly employee,
you make a wage. Even if you’re a salaried employee, you’re also making a wage, just in the form of a salary. On the other hand, profits are income that you might receive as a benefit of ownership. So if you own a company that is profitable, you can receive income in the form of profit from your company. If you own stocks in other companies –
which is really the same thing, right? That’s ownership in a company – then you might receive a dividend, which is a distribution of profit. In order to more properly make my point, there’s two more definitions that are useful. Active income is income that requires your input to receive. So wages, of course, are most definitely active income. If you don’t work,
you don’t receive your wage or your income. Passive income, on the other hand, requires your input early on in order to get things rolling, and now it doesn’t, or it never required your manual input at all. Passive income is sometimes referred to as mailbox money. All that’s required is that you open up your mailbox and pull out your checks. And how lucky that we, today, don’t even have to do that!
We could just have, we could be completely lazy and never leave the house and just watch our bank accounts grow as that money automatically shows up in our account instead of our mailbox. So that’s active versus passive. Active requires input. It requires work. And passive might, early on, require work to get things rolling and then subsequently it doesn’t require any work or input by you.
It just comes. So passive income is like profit. So there are some differences here in that, you know, when it comes to tax treatment, and I’m not going to talk about that today. So I’m just talking about kind of the philosophy side of it today. But I want to say to you that passive income is an awful lot like profit, psychologically.
So let’s talk about some examples of that. Let’s look at rental income. If you buy a property, whether or not it’s a residential property or a commercial property, if the goal is to rent it to other people, you might first have to put some work in to fix up the property. So that’s active, right? You’re putting in the work and you’re not going to get paid, at first.
You might do the work yourself. You might pay someone else to do it, but it requires your input. But once that work is done, then the income that you make from the property, from that point forward, is largely going to be passive income. It comes to you regularly without the need for your ongoing input. Okay, now I don’t, we don’t need to split hairs here.
I do know that ongoing maintenance would be required, but I’m talking about, I’m just trying to simplify and make the explanation easy. So now what about royalties? Royalties would be another example. If you’re a creative person, you might produce some creative work such as a book, that requires lots of work upfront, but once the book is finished,
if it’s successful, it might provide ongoing income to you in the form of royalties. And that could potentially be indefinitely. So there are more examples of passive income, but hopefully you get the idea. Once established, that passive income produces mailbox money. Profits and passive are better than wages. So let’s return now to the original premise of my, point of my talk today.
And that is that, hearing that assertion, that profits are better than wages, it made me realize that when we are planning our financial lives, we might be a little shortsighted. Because most often we focus on ways that we can make the most of our WAGES. Can we cut expenses? Can we get a raise? Can we increase our education so we can get a better paying job?
So there’s nothing wrong with that. Those are all important things to think about. If we’re a wage earner, we should be focused on how to increase our value as an employee, and be able to increase our wage. And we should be able to, or should have to focus on our expenses, so that if we live within our income, we’d still have enough money leftover to set aside for savings and investment.
But I’m thinking here that we’re missing an important consideration, and that is income diversification. So, maybe instead of just thinking about wages, maybe in addition to keeping our expenses down, we should also be working on a plan to increase our income from profits and passive sources. So just like diversification in our investments is good for risk reduction, diversification in our income sources would also be good for risk reduction.
So now, unfortunately there’s a huge difference between recognizing that we should have income diversification, and then actually creating it. So depending on the type of passive income that you’re interested to build, it’s going to require money, or it’s going to require your time, or it’s going to require your money AND your time. Building an investment portfolio, for example, that will produce an income for you in the future,
so that’s a great idea, but what’s it going to cost you? At a minimum, it’s going to require some discipline now in sacrifice of current income, in order to invest it for the future. So there’s going to be current costs in order to have future passive income from those investments. And frankly, some people are just not willing to make that sacrifice. They’re not willing to sacrifice their current lifestyle in a way that’s necessary to build a long-term successful investment portfolio.
Now in buying investment property that will produce income for you in the future, that’s a great idea, but what will that cost you? That might require a large investment of cash upfront to purchase the property, or it also might require taking on a large amount of debt, which adds risk, of course, to your financial life. And it might require a considerable investment of your time,
your manual labor to fix up the property, and more cash outlay to renovate the property. Some people aren’t willing to make that sacrifice to their current lifestyle, just like with investments, financial investments. They’re not willing to sacrifice how they live their life now, in order to have the extra money to buy, up-fit and manage rental or investment property. Producing some sort of creative work,
like authoring a book or creating some sort of music or other, just whatever creative venture you might think of. In the goal of producing royalty for you in the future, royalty income, that’s a great idea also, but what will that cost you? That might require hours and hours and hours of your time, upfront, to create your product,
whatever it is, whatever your creative product is. And then you might spend all that time doing it, and it might be a flop, and it might amount to nothing. So that’s a huge cost. And some people are just not willing to make that sacrifice to their current lifestyle. They’re not willing to spend the time to put in the hard work, to create something
now, that might create an income for them later. So now, mailbox money is the reward. But the time and energy, that’s the price that you pay in order to get that mailbox money. So it’s easy to talk about mailbox money, and sometimes you hear these, you know, talking head people on the internet or on other forms of media, and they make it sound like it’s easy.
Like, “Oh, well, all you have to do is create all of these passive income sources, and then you will have your mailbox money, and you can go through life happy.” But that’s going to take sacrifice. Getting to the mailbox money requires sacrifice. And so the people who are willing to make that sacrifice, in the ways that are necessary to create that profit or passive income in the future,
those people will be rewarded with potentially a lifetime of mailbox money. So here’s the common denominator here: time and energy. So there’s lots of schemes on the internet, like I was sort of just alluding to, and elsewhere that describe how ‘you too can become rich overnight with minimal effort!’ And if you don’t already know by now that that idea is just pure crap,
then let me enlighten you. That idea is pure crap. The only one getting rich in those scenarios is the person promoting that idea. So now, don’t get me wrong, not all internet entrepreneurs are scam artists. But anyone telling you that you can make a fortune by merely thinking about it, or by, you know, means of no real investment of your time and money –
it’s pure crap. You can get there, but it’s going to require effort and sacrifice. So if income diversification is what you want, the question is simple. What are you willing to sacrifice to get to that point, to get to that income diversification, to get that mailbox money? Don’t fall prey to the people who tell you that it can be done overnight or that all you have to do is think about it, or chant about it,
and your riches will come. It’s good to have a mantra. It’s good to have a focus. It’s good to tell yourself positive messages to keep yourself geared up. But that does not take the place of the work that has to be done in order to get where you want to be. It is going to require time and effort. Could require time, could require effort,
most likely will require both. And it might actually require money. So it might actually require you to forgo some of that, in current income, like we talked about earlier, in order to invest in one of those sources for later, so that you have income later. So now I’d like to hear from you, how have you diversified your income and what did it cost you?
What did you have to do in order to get to the place where you have income diversification? You can share your ideas with me via email, it’s email@example.com. Or you can join the SimpleMoney Community on Facebook and talk about it there. But I’d be very interested to hear ways that you have made the sacrifices now, in order to
pay in to your growing of your mailbox money, your passive income, later in your life. Thanks for listening. If you enjoyed the SimpleMoney Podcast, be sure to subscribe on your favorite podcast player. We’d love it if you would leave us feedback and a review. And don’t forget to check out my blog at simplemoneypro.com. There you’ll find dozens of posts about financial issues that matter to you, as well as thought-provoking pieces about simplifying your life.
Bye for now.