Words of Wisdom

A wise man learns by the mistakes of others, a fool by his own. --Latin Proverb

Monday, May 7, 2012

Passive Income vs. Active Income: A Tale of Two Wallets

Good evening everyone! I hope you all had a productive Monday, despite how unpleasant Monday's tend to be.  Have you ever really put much thought into why most people absoultely loathe Monday?  I mean, afterall, it's just another day isn't it?  Well, I've put quite a bit of thought into it.  For starters, what makes Monday different from Sunday?  If you're like most people, Monday means the end of your two non-working days and the beginning of a new five-day working stretch.

But what's wrong with that?  When you're working, you're making money.  Most people enjoy having money so it would stand to reason that most people should like to work, meaning that Monday should be an enjoyable time.  But we all know that this isn't the case.  The truth is most people don't like going back to work because they either don't like what they do, or they don't make enough money doing what they do.  Which is it for you?

In my case, it's a little bit of both.  I enjoy what I do, to a point... especially at first.  I'm the type of person that needs constant change to stay interested.  After being at the company for nine months and in my current position for six, everything has gotten a little too redundant.  Redundancy does not equal enjoyment in my book.  Then there's the money.  I make enough to get by, but there isn't much for leisure, or savings, or anything of that sort.  It's pretty much a paycheck to paycheck situation, like many Americans.  Why is it that so many people fall into this type of financial lifestyle? 


Active Income

Many of us earn our money actively.  Simply put, we're only making money if we're on the clock.  We have to get up, get ready, race to our place of employment with all of our fellow active incomers (which can be somewhat costly in itself depending on your commute) to arrive at work, punch in, and begin muddling through the tasks that have been set before us by those who make more money than us.  This is the problem.  We spend our lives racking up hours hoping that by the time the pay period ends, we will have enough to cover our cost of living.  Call me crazy, but there has to be a better way.  Did you know that the hours you work aren't only making you money?  It's true!  Every hour you work you aren't only earning a wage for yourself, but also a wage for someone above you.  If for some reason you're reading this while standing, you may want to take a seat for this one.  Did you know that the people above you are making more money off of your sweat and tears than you are?  Let me give you an example to clarify...

Say you are a mechanic in a repair shop.  If you've ever had you're vehicle worked on before, you know that you have to pay for the parts they put on your car (usually at a slight mark-up) as well as the hours it takes to complete the work.  So, as a mechanic you make $20 per billed hour that you work. You do a job that took 5 hours to complete so you earned $100 for that job.  Not bad, but let's think about it in a different way.  If the customer only paid $20 per hour, the company wouldn't make any money other than the mark-up on parts.  So in reality, the customer is billed $70 per hour for labor.  This would mean that you make $100 for working on this car, and your boss makes $250 because you worked on the car.  Let's also look at it on a larger scale. 

The average full-time work week is 40 hours.  Let's apply that to our little scenario.  You, the mechanic, worked 40 hours, earning yourself $800 for the week or $41,600 per year assuming you work the same amount every week.  Congratulations! You made it to middle-class.  But what did your boss make?  Off of your 40 hours, every week your boss earns $2,000 bringing his annual income up to a whopping $104,000.  If this doesn't make you grit your teeth enough in protest, brace yourself.  In most situations, you aren't the only mechanic working there.  In fact, he may have five or ten others just like you earning him just as much money.  So tell me this... who would you rather be; the mechanic or the boss?  I thought so...


Passive Income

I'm hoping the above example got you thinking.  But what are you thinking?  Is the mechanic's boss a terrible person for making so much more money than the mechanic?  Certainly not!  Realistically, assuming the boss owns the company he has overhead to keep the business running, as well as bills of his own.  The key here is that even though he wasn't the one turning wrenches, he is able to secure a substantial income for himself.  In fact, he doesn't even have to be in the building to make it.  This my friends is passive income.  This is the better way.  Do you have to run a mechanic shop or other type of physical business to earn this type of income?  Absolutely not!  In fact, you can most likely earn more without a physical location because overhead would be much less. 

Think about Facebook.  Where is Facebook located? No, not Facebook heardquarters, but Facebook itself?  The living breathing Facebook lives on the internet.  It isn't a subscription service.  You don't have to pay every month to use it,  They aren't really selling anything and yet in 2011 Facebook brought in $3.7 billion dollars.  I hate typing it like that because it tends to lose it's meaning.  What I mean to say is that Facebook brought in $3,700,000,000.00!  That's pretty impressive for something that started in a dorm room.


The Moral of The Story

So what does it all mean?  Well, honestly that depends on you.  What does it mean to you?  For me, it's proof that we've got it all wrong.  In my mind, the 9-5 is nothing more than a form of indentured servitude.  We are slaves to the almighty paycheck and spend the majority of our lives working for it.  I know that if I'm ever to make anything more of myself than I am today, then it has to stop, and quickly, for the clock continues to tick whether we want it to or not... and I'm not talking about a timeclock.

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