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As soon as you stop working and your skills become outdated, your income will stop.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.
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.