How do you make your income? Do you earn it through wages, or does it come to you via profits? This past week, I was listening to an audiobook (while on the treadmill, oh yeah!), and this topic came up. It was curious to me, because the book was about ambition, and this concept of profit versus wages came up in almost an afterthought sort of way.
Despite the topic only occupying two or three minutes of the audiobook, it got me to thinking. The premise of the book’s mention was this: profit is superior to wages. I certainly don’t disagree with that assertion, but what occurred to me was how people have very different mindsets when it comes to how they acquire their money. Let’s take a look.
First, we should define what it is we’re discussing here. Wages would constitute the money you make working on a job while employed by someone else. If you are an hourly employee, you make a wage. If you are a salaried employee, you also make a wage.
On the other hand, profits are income you might receive as a benefit of ownership. 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 – ownership in a company, see this post), you might receive a dividend, which is a distribution of profit.
In order to properly make my point in this post, here are two more definitions that are useful. Active income is income that requires your input to receive. Wages are most definitely active income. If you don’t work, you don’t receive your income.
Passive income, on the other hand, either required your input early on to get things rolling and now doesn’t, or it never required your manual input at all. Passive income is sometimes referred to as Mailbox Money. All that is required is that you open your mailbox and pull out your checks. (And how lucky are we today that we don’t even have to do THAT. We can be completely lazy, never leave the house, and just watch our bank account grow!)
Passive income is like profit
While there are some differences in tax treatment (a subject for another day), I would like to suggest that passive income is an awful lot like profit, psychologically. Let’s look at some examples.
Rental income. If you buy a property, whether residential or commercial, with the goal to rent it to others, you might first have to put in some work to fix up the property. You might do the work yourself or pay someone else to do it, but it requires your input. Once that work is done, the income you make from the property from that point forward is largely passive. It comes to you regularly, without the need for your ongoing input. (No need to split hairs here, I do recognize that ongoing maintenance would be required. I’m trying to simplify my explanation!)
Royalties. If you are a creative person, you might produce some creative work, such as a book, that requires loads of work up front. But after the book is finished, if it is successful, it might provide ongoing income to you in the form of royalties.
There are more examples of passive income, but hopefully you get the idea. Once established, passive income produces mailbox money.
Profits (and passive) are better than wages
Returning to the original premise of this post, hearing the assertion that “profits are better than wages” made me realize that as we plan our financial lives, we might be a bit short-sighted. Most often, we focus on ways we can make the most of our wages. Can we cut expenses, or get a raise? Can we increase our education to get a better-paying job?
Now, there isn’t anything wrong with that. Those are important things to think about. If we are a wage earner, we SHOULD be focused on how to increase our value and thus increase our wage. We SHOULD focus on our expenses so that we live within our income and still get some money set aside for savings.
But maybe we are missing an important consideration: income diversification.
Maybe in addition to working on keeping our expenses down and improving our wage income, we should also be working on a plan to increase our income from profits and passive sources. Just like diversification in our investments is good for risk reduction, diversification in our income sources would also be good for risk reduction.
Building profit is no easy task
Unfortunately, there is a huge difference between recognizing we should have income diversification and actually creating it. Depending on the type of passive income you are interested to build, it is going to require money or your time, or perhaps both.
Building an investment portfolio that will produce income for you in the future is a great idea. But what will it cost you? At a minimum, it will require some discipline and sacrifice of current income in order to invest for the future.
Some people are not willing to make the sacrifice to their current lifestyle in a way that is necessary to build an investment portfolio.
Buying investment property that will produce income for you in the future is a great idea. But what will it cost you? It might require a large investment of cash upfront to purchase the property. It might also require taking on a large amount of debt (which ADDS risk to your financial life). And it might require considerable investment of your time, manual labor to fix up the property, and more cash outlay for renovation.
Some people are not willing to make the sacrifice to their current lifestyle in a way that is necessary to buy, upfit, and manage rental or investment property,
Producing some sort of creative work, such as authoring a book, in order to produce royalty income for you in the future is a great idea. But what will it cost you? It might require hours and hours of your time to create your product. You might spend all that time creating it, only to find it is a flop (a risk to your ego?).
Some people are not willing to make the sacrifice to their current lifestyle in a way that is necessary to commit the hours to product creation.
Mailbox money is the reward, but time and energy are the price you pay
The people who ARE willing to make the sacrifice in their current lifestyle in the ways necessary to create profit and/or passive income will be rewarded with potentially a lifetime of mailbox money.
The common denominator is this: time and energy. Schemes abound on the internet and elsewhere that describe how you, too, can become rich overnight! With minimal effort! If you don’t already know by now that this idea is pure crap, then let me enlighten you: that idea is pure crap. The only one getting rich in that scenario is the person promoting the idea.
Not all internet entrepreneurs are scam artists, don’t get me wrong. But anyone telling you that you can make a fortune by merely thinking about it or by means of no real investment of your time and money is pulling your leg.
You can get there, but it will take effort and sacrifice. So, if income diversification is what you desire, the real question is this:
What are you willing to sacrifice to get there?
What have you done to diversify your income? Share below! Or if you want to start a discussion with some like-minded friends, join the free SimpleMoney Community on Facebook to share your thoughts!
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