Freedom and the Three Types of Income

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freedomWe talk a lot about freedom in the US: Freedom of speech, freedom of religion, freedom to do what we want, freedom to live where we want, etc. In my opinion, none of these freedoms make us free until we also have financial freedom. What’s the point of freedom to do what we want if we can’t afford to do anything? And that’s why I care so much about the way money is made.

If you’re working for someone else, you’re putting your whole future in their hands. You work to build an asset for someone else and if the ownership and/or management makes a bad decision, you’re the one who pays the price.

That means you have a big risk and no possible upside. If it goes well, the owner prospers. If it doesn’t go well, you pay the price. Of course, there are some situations where you could be in the right place at the right time. I knew an accountant in Colorado who took a job with a start-up tea company, working out of the owner’s garage. He couldn’t pay her much, so she took shares. The company became Celestial Seasonings. She did great. But there are a 1000 more stories of people who didn’t luck out. These are the people who put their heart and soul into their job and then lost it to technology, outsourcing or reallocation of resources.

That’s why I’m such a fan of small business. A small business could be a part-time business, a side business, a service business, an Internet business…. the list goes on and on, but the fact is that they are all businesses that let you start building income outside a job.

In the beginning, most businesses require you to work IN the business. If you don’t show up, you don’t get paid. In fact, in the beginning, you may find that you work long hours for little money. But after you get the market and message dialed in, the money gets easier.

Active Income = You working for the money

The buzz lately has been about passive income. Passive income is money that just shows up, without you having to work for it. There is no consensus on the definition of what passive income actually is. I personally define passive as income that you need to work 5 hours per week or less on. If you have money invested that provides you interest and dividends, you might not need to spend that much time. But if you have a business or real estate investments, you probably will.

Passive Income = 5 hours or less per week

The final type of income is leveraged. In this case, you may have a business that you still work in, maybe even full time. But you make more money than you would make just from your own efforts on an hourly basis. A great example of that is a Dr’s office. The nurse brings you in and takes your vitals. You may see a Physician Assistant to describe your symptoms. And then the Dr comes in for a very brief time. You pay the office, but for a lot more than the few minutes you had with the Dr.

Leveraged Income = Income that is partially due to your efforts, but enhanced by technology, other people’s time or expertise or other items

Once you have a business, get it profitable. And then start looking at systems and methods to increase your cash flow. Move from active income to leverage income and on to passive income.

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