Why Passive Income is Important to your Financial Well-being
“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
