linear income

linear income

What is the Problem with Linear Income?

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You have only 24 Hours in a Day

The main problem with linear or earned income is that you are trading your time and skills for money. Your earning power will be limited by the time and skills you personally have which is a very inefficient and arduous way of earning wealth. You have only X number of hours in a day and there is a limit to the skills you can acquire—these limiting factors will put a cap on your income.

Linear Income Dries up Quick

As soon as you stop working and your skills become outdated, your income will stop. You can take time out to upgrade your skills but during that period, your income level will either drop or stop altogether.

When it comes to linear income, you are the golden goose. As you grow older, your physical and mental capacities regress. This will reflect directly on your earned income. In case of an adversity, your income will drop to a virtual zero.

Linear Income Gets Taxed at Higher Rate

Another major issue with earned income is that in virtually every country, it is taxed more heavily when compared to investments or residual income.

linear income

The biggest financial outflow in your life are the taxes. You pay virtually 40–70% of your earnings to the government in the form of direct and indirect taxes. These include: income tax, GST, customs and excise duty, capital gains tax, estate duty, stamp duty, service tax, VAT, property taxes, regional council taxes etc. Some of the indirect taxes are invisible and you don’t even come to know about them.

Linear or earned income has a limited number of loopholes to save on the taxes. If you are working as an employee, you have to start investing or start a part-time business to save on the taxes that will provide you with additional funds to build residual income for you and your family. This may seem unfair but it is true. Most governments want you to invest your money so that capital formulation creates more jobs. This is why they give huge tax breaks to investors and business owners. You should take advantage of these tax breaks to create residual income for yourself.

Why People Seek Jobs if Linear Income is so Bad?

If earned income has so many drawbacks, why most people seek jobs? The reasons are unequivocal: jobs do not require a start-up capital, nor does it come with a risk. Most people when starting out in life do not have capital and are risk-averse. The fault also lies in our education system which was designed during the industrial age to train people for jobs that the industries run by capitalists required. Things have changed dramatically with the advent of the information age; it is now possible to earn residual income with very little or virtually no start-up capital and risks.

There is no harm in starting out with a job because of economic circumstances. A job may also be essential for some people because it can instill discipline and teach skills that are required to succeed in life. The trick is to convert your linear income into residual income within the shortest period of time.

What is True Wealth?

Can you become wealthy from earned income? It depends on your definition of wealth. Some professionals like doctors, investment bankers, lawyers and engineers are highly paid. But are they really rich or simply appearing to be rich? Do their jobs provide long-term financial security? Can they sustain their lifestyles if they lose their jobs for any reason?

According to me, the true secret of wealth is not that you have more money but that you have more freedom of time—you do not have to trade your time for earning money! You will be rich when you not only sustain your lifestyle without working, but also improve on it. In that case, you have sufficient residual income to not only sustain your lifestyle but also make your wealth grow by further investments into generating passive income.

When you are trading time for money, you do not have time-freedom. You can definitely become wealthier if you invest a part of your earned income into creating residual income, which in due course of time can surpass your earned income.

passive income

Why Passive Income is Important to your Financial Well-being

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“Wealth is when small efforts produce big results, Poverty is when big efforts produce small results” – George David

Linear Income

One of the fundamentals of wealth creation is to know that not all income streams are created equal. When you work and are paid only once then your income is linear.

Doctors, dentists, sales persons and attorneys may appear to have impressive incomes but they are linear in nature. Their incomes are capped depending upon the number of hours they work. If they don’t show up for work due to any reason, their income comes to a grinding halt. They trade hours of work for income.

This kind of an income comes with potential risks. In case of ill health or an accident, their income dries up immediately. This has dire consequences for the financial well-being of the individual and their families. Even if one is insured, the money runs out ultimately and there is a need to downgrade—changing lifestyles and making adjustments that can be very painful.

What is Passive Income?

In the case of passive income, you work hard once and it unleashes a steady flow of income for years and maybe even a lifetime or beyond. It is often said that the lower and middle-class work for money whereas the rich make their money work for them; the key to wealth creation lies in this simple statement.

Royalties from Elvis Presley’s songs and movies earn an income more than $40.0 million every year even though he has been dead for over three decades. Although everyone cannot be an Elvis Presley, it is definitely possible to focus on work that will create a residual income rather than spend a lifetime in working for linear income.

What is Wealth?

The true definition of wealth is the time period in which you can sustain your lifestyle in case you stop working today. If you can sustain your lifestyle for only a few months then it is a cause for serious concern but if you can do it for a couple of years, you are better off. On the other hand, if you can sustain your lifestyle indefinitely without work then you can be termed as wealthy. Once you reach this stage, you can retire.

It must be remembered that, contrary to what many think, you need more money after retiring because now you have all the time in the world to holiday and spend money, and also to pay off those medical bills. If you are banking on social security or pension as your only residual income source, you are in for serious disappointment.

How to Shift from Linear to Creating Passive Income?

Almost all of us, with the exception of a few very rich people, start with a linear income. The smart ones are those who start shifting their incomes from linear to residual from a very young age.

Every day when you wake up, you must ask yourself the question: “What percentage of my income is residual?” Also ask yourself, “How many hours am I going to devote today towards creating a residual income.” If you don’t ask these questions, you will remain where you are.

You are in big trouble if you devote zero hours towards creating passive income. Remember: true wealth is created by focusing on work that creates an income for a lifetime. For every hour of work you put in, you should be paid again and again and not only once as in the case of linear income. Therein lies the secret of wealth creation.

“How many times do you get paid for every hour of work you put in?” The answer to this question will tell you if your income is linear or passive—if you are paid only once for your work then your income is linear. If you don’t show up for work, you don’t get paid. You work from paycheck to paycheck. When the source of your income is residual, you get paid for your effort again and again.

One of the main reasons why people find it difficult to leap from linear or earned income to residual income is that the entire education system is designed to prepare people to get jobs that can pay them salaries. This helps the big businesses to get trained labor for their industries and also works well for the government in collecting tax dollars because paid workers pay the highest amount of tax.

“When a Man tells you that he got rich through hard work, ask him “Whose?”
Don Marquis

You have to create a shift in your thinking before you can start generating residual income. You have to free yourself from the shackles of the unfortunate education system that has gripped your psychology.

By shifting gradually from earned income to residual income you will find financial freedom for life.

Video courtesy of Youtube.com