Most people that I meet think of money as just a way to pay the bills. The mentality seems to be that as long as I can keep earning just as much or more than I spend any given month, I am doing okay. We humans are such short sighted creatures. What we fail to recognize is that if we only ever live month to month paying bills and hoping that nothing changes, we are going to find ourselves severely disappointed and in a financial bind. Bad things happen everyday. Almost nothing ever goes completely according to plan.
We get sick. We get fired. Our homes flood. We got old.
Since the majority of us Americans do not have a requisite savings account balance, we put ourselves in a very tough situation. Now obviously putting money into your savings account and building up a substantial amount will help to buffer against your rainy days/weeks/months and will do a TON to help you out in such situations, but there is a better way!
First let me point out what too many fail to recognize: There are different types of income
If you believe that the way to be financially stable when you reach retirement is by just working full time until you are 65 and make regular monthly deposits into your IRA account then you are ill advised. The world in changing. Sure this strategy works for some people, but they’re never as financially set as they’d like to be. Besides, do you want to wait until you are 65 to be able to enjoy your wealth?
Earned or Active Income
The first type of income that everyone is familiar with is Earned Income. This is where you work for 40 hours a week and then you get a paycheck. This type of income is very important and we all need to utilize this income source in order to achieve financial freedom, but only relying on this source of income is a grave mistake. This income stops going into our pocket the minute we stop working, meaning that when we retire we stop getting paid. I’m sure we’d all retire earlier if this wasn’t the case!
You may have heard this term. It is commonly misused. The natural connotation with this phrase is that you don’t do anything and you just get money. This is far from the truth. A bunch of hard work is required to set up a passive income opportunity, but once you’ve got this income source coming in, it takes much less effort to maintain it’s momentum. The income earned from this is often times referred to as a passive income stream. I found a site that does a decent job of explaining the passive type of income source here: GoodnightSam.com . I would recommend working to set up this type of income to whatever extent possible. Some examples of passive income are: Rental Income, creating and selling intellectual property through an automated system, and any business income earned that wasn’t dependent on the amount of time and effort you put into it. These types of income will continue flowing long after you’ve stopped working on them or retired.
You gain this type of income by selling things for more than you paid for them. Most people are familiar with the term “buy low, sell high.” That is the idea here. This is another smart method of earning money as you do not have to directly work for it and thus like passive income, should be used to help supplement your earned income. Stock, Bonds, Mutual Funds, and Real Estate all fall into this category.
Building up all 3 types of income will not only help you in the short run, but will increase your chances of being financially stable in the future.