One of my biggest money mistakes in my younger years was treating money like a disposable (maybe it’s due to the fact that after-tax income is also referred to as “disposable income”). The word “disposable” means that it is intended to be used once, then thrown away. This was most evident when we were planning our wedding in 2011. I am embarrassed to say that we spent $40,000 on our wedding for 300 people. On ONE day. That’s enough to pay for an entire year of living expenses! Before the wedding, I remember having dinner with our friends one evening and somehow the topic of staying within budget came up. One friend said to me, “Don’t worry about it. You have a job, you can always make more money to pay for it.” At the time, I was earning about $60,000 a year, so a $40,000 wedding was really stretching my budget. My friend isn’t alone in thinking about money this way though. Most Americans treat their money as a disposable–they earn it, spend it, then earn more money so they can spend it again. Once that money is gone, they go back to trading their time for more money. Sometimes they overspend and have to rely on credit cards to pull them through.
The Golden Goose Mentality
What if, instead of treating our money as a disposable, we treated it as if it were a golden goose? But there’s a catch—the goose you have isn’t mature enough to produce any golden eggs yet. You will still need to invest the time and money to raise it until it matures and can start producing eggs. And oh, there’s no guarantee it’ll survive until then (all investments have risk). What would you do with your goose? Some people trade in their goose before it has had a chance to lay any eggs, so they never even realize its full potential. The rich invest in their goose (they invest in many geese, actually).
If you want to be rich, you will have to stop treating money like it’s a disposable. You should view every dollar as a hard-working goose, with the potential to reward you with wealth if you invest in it properly.
Instead of trading in your goose before it has laid any eggs to buy a bigger house, faster car, etc., what if you used it to buy assets like stocks or rental properties that can generate even more money for you? You start off gradual of course, but as your career progresses and you have more money to put towards acquiring more assets, the income from those assets will one day be able to cover your living expenses. Instead of being stuck in a cycle of constantly trading your time for money, you set up a system that generates its own money. Once that money covers your basic living expenses, working becomes optional. What would you do with your time if you no longer had to work (waaaay before you even turn 65)?
The Goal: To Create Multiple Income Sources
A good paying job (i.e. earned income) is a good starting point, but your goal should be to try to convert that one source of income into many streams of income so you can acquire more assets (golden geese). The faster that you can acquire assets, the closer you are to financial freedom. Which means, you will need to learn how to cut your expenses or, on the flip side of the equation, increase your income to be able to acquire more assets. Millionaires typically have multiple sources of income. There are seven streams of income total, including earned income. The other streams of income are as follows:
Profit – Money that you earn by selling something for more than it costs you to make (e.g. businesses selling their goods at a profit, whether at the retail or wholesale level, as distributors or manufacturers). One trend I’ve seen that’s gaining in popularity in recent years is the reselling of goods through the Amazon FBA program (FBA stands for Fulfillment By Amazon). Basically, a person researches a profitable product that can be resold and fulfilled by Amazon, sources that item, and have it sent to an Amazon distribution center for fulfillment.
Interest – Money you get as a result of lending your money to someone else to use (e.g. high yield savings account, Certificates of Deposit (CDs), lending it to the government in the form of buying Treasury Bills, etc.).
Dividend Income – Money that a company pays out to its shareholders (e.g. the dividend that most companies announce at the year end). You can learn to invest in dividend stocks and use the dividend to buy more stocks that produce more dividends.
Rental Income – Money that you get as a result of renting out an asset that you own (e.g. rental property). For a $100,000 property like the one I just bought, I receive $1,100 in gross rent every month that I can save up to buy another property or invest in another asset.
Capital Gains – Money that you get as a result of an increase in value of an asset that you own (e.g. when you buy a stock at $10 and sell them at $11 the $1 is capital gains, or if you buy your house for $200,000 and sell it for $220,000 the $20,000 is your capital gain).
Royalties – Money you get as a result of letting someone use your products, ideas, or processes (e.g. a song you’ve written, a book, a patent, franchise, etc.).
Some assets can result in more than one income stream. For example, stocks can provide you with both dividend income and capital gains. Rental property can provide you with both rental income and capital gains. A book can provide you with both profits and royalties.
Of the seven streams of income, do you know which is taxed the highest? Earned income. Earned income is subject to Social Security/Medicare taxes (called FICA, OASDI, or payroll taxes) AND federal and state income taxes. Unearned income (also known as passive income) such as interest income are taxed at the marginal tax rate, but is not subject to payroll taxes. Certain types of passive income, such as capital gains and qualified dividends, are taxed at an even lower rate. Warren Buffet told the media that he pays a lower tax rate than his secretary—it’s true. It’s how some top earners pay a lower tax rate than you and me. The bottom line is, if you want to be rich, you will need to stop viewing your money as a disposable. Work on converting your earned income into assets (golden geese) that produce passive income (golden eggs). This simple mind shift has helped me make hundreds of thousands of dollars in additional passive income.
Which income stream(s) are you most interested in pursuing?