business terms

The Examination of Income (Part 1)

It has been said that, “The wealthy earn 70-100% of their income from their assets, while the poor and middle class only earn 0-30% of their income from their assets.”

After reading this statement I automatically realized that if I want to become wealthy, I have to acquire more income generating assets. I know that seems obvious, but sometimes we need the obvious as a reality check: Where am I on the road to wealth? This inspired me to do some research on how and where income can be generated. I pulled an article from Moolanomy that was spot on! Because it contained a lot of very important topics, I divided the article into sections to emphasizes the importance of each topic separately. I will be revisiting the article in future post to expound on the remaining topics.  Below is part 1 of the series of posting I plan to do, so continue coming back.

Sources of Income
o Primary Income – The most common source of primary income is working for wages. You exchange your time for money (wages), and maybe some benefits.
o Alternative Income – This is income earned outside of wages. A common example is dividend paying stocks, online business revenue, or profit from rental properties.

Types of Income
o Active Income (Earned Income) – You work for money. The key characteristic is the cost of time. You MUST trade time (Limited resource) for money. Therefore if you stop trading your time, you stop making money.
o Passive Income (Residual Income) – Money is working for you. This is the total opposite of active income. Because, even when you stop spending time on these passive income streams the money does not necessarily stop. There are varying degrees of passiveness and the strength of the income flow.

Here’s an illustration of active-passive income spectrum:

incomespectrum

My goal is to diversify my income by building multiple streams of income while purposefully moving towards passive sources.

Why Should You Even Care About Alternative Income?
Simply put, alternative income increases your total income and accelerates your ability to build wealth. Since we say that someone is financially free when they are independent from their primary source of income (mean they can choose not to work), the alternative income can supplement (take the place of) your primary income, thus bringing you closer to financial freedom and wealth building.


Discussion

5 comments for “The Examination of Income (Part 1)”

  1. Good stuff!

    Posted by Daddy Bawsten | February 25, 2009, 8:26 am
  2. Thanks for ECONOMICS 101, this is a waste of web space

    Posted by Marty Firestein | February 25, 2009, 9:58 am
  3. this is a good read for starters i cant wait to read the post on this subject

    Posted by Kevin Blackman | February 25, 2009, 6:24 pm
  4. I got a Business Degree from University of Texas, which is top 10, and even though you may know it a lot of people don’t apply it. I think the diagram is great. Great article, can’t wait to read more!

    Posted by Mike | February 25, 2009, 6:31 pm
  5. The active-passive spectrum made the whole idea make sense for me. It’s true that managing a portfolio of businesses can be either really hands on or really hands off. Important concepts.

    Posted by MicG | March 3, 2009, 3:35 am

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