All Income Is Not Equal

Today I want to talk about one of the most common misperceptions that people have about jobs and income. I remember a couple of years ago, Mary and I were eating out with a friend, and we mentioned that Mary’s gluten free recipes website was starting to generate some cash flow. The friend asked us how much it had made, and we replied that it was around $100 for the last three or four months.

We were pretty proud of cash flow that we had created, but our friend was clearly surprised that the amount was so low. Why be excited about something that makes you only $20 or $30 a month? The answer lies in the difference between earned and passive income. Let’s take a look at that difference, and see why even small amounts of passive income can be so great.

Income

Let’s say I got a job that paid me $1,000 a month. Is that a good or bad job? Most of you probably said it’s a bad job. However, the astute (and amazingly polite) among you said “I need more information before I can answer that question, please, sir.” And you’re right, you do need more information before you can answer.

As it happens, the job I just got pays me $1,000 a month in exchange for 40 hours of work each week. It’s a typical full time job. So is it a good job or a bad job? Well, it’s not too good. Work a full time job for an annual salary of $12,000? No, thanks.

But now let’s say that the job only requires 20 hours per week. The income has stayed the same, but now the job is a bit better. I could get two of these jobs, work 40 hours a week, and double my yearly income to $24,000. Things are looking up a bit, right?

Now let’s say that the job only requires 8 hours of work each week, and your time will be spent testing the comfort levels of various hammocks while on a beach in the Caribbean. Now, that’s a job! You could get 5 of those gigs, spend all your time on the beach, and make $60,000 a year. Not too shabby.

But as good as all of this sounds, there’s still one problem with each of these jobs. They all require you to trade your time for money. Your earnings potential is capped at the amount of time you have available to spend on the job. If you want to take some time off, if you want to scale back your hours to spend more time with your family, or if you leave for a new job, your income is going to decline. Ultimately, if you quit working altogether, your income will stop completely. I’ve yet to hear of a job where they’ll pay you to *not* work.

Talking about income and work in this way probably sounds a bit silly to most people. Of course you have to work to get paid! It’s as basic a fact as saying that the sky is blue or that sticking your finger in a light socket is bad. But the truth of the matter is, this is not the only way to make money. In fact, this is not even the best way to make money. To be perfectly honest, it’s just about the worst way to make money!

Passive Income

Just about anyone who has access to CNBC or the financial section of a newspaper has probably heard about passive income. But let’s take a minute to discuss exactly what it is.

Passive income (and I’m using a practical, working definition of it; not the official accounting definition) is simply income that you earn while you are not working. Or, to be more specific, it’s income from a system or project that is earned even when you are not working directly on that system or project. It is differentiated from earned income, which requires you to be working directly to generate money.

I’m not going to delve too deeply into passive income systems today, but I do want to talk about why passive income is so great. Remember the website up above? Let’s say that it makes $25 each month, with little to no attention from Mary. That means her website is earning her money when she’s watching TV, asleep, feeding the baby or whatever else she wants to do. It also means – and this is the important point – that her website will continue to plug along and make money even when Mary decides to start up a new website. And in a few months, that new website is making $25 a month. And so she starts up another one, and another one, and another one. Before long she’s got a couple hundred coming in each month (or more) and it’s all passive income.

Do you see why we were excited about making $20 from her website now? We’ve since gone on to start several new websites, and her gluten free site is still plugging along for us. That’s the power of creating passive income systems. Instead of being limited by the amount of time you want to spend actively working, you’re only limited by the number of systems you want to create. Right now, my goal is 20 different systems. When I hit that goal, I’ll probably shoot for 50. Why just have one job?

If all of this is too much to digest at once (or if it totally blows your mind), don’t worry. It’s a big paradigm shift, and it can take some time to sink in fully. In some future posts we’ll explore passive income and the systems that produce it more fully, but for now, just give some thought to the strength of passive income and what it could mean to you.

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This is Part One in my series on passive income. Check out the other parts below.

1) All Income Is Not Equal
2) Using Passive Income Systems To Make Money