Income – Your Personal Economy

February 4, 2021

This is the fourth post in my new Pillars of Personal Finance series.

More than a Job

When most people think about Income, they usually think about a job. If they are innovative, they may think about a business, a side-hustle or some passive income. Creative types may think about intellectual property and royalties. High-income earners may think about leveraged investments and capital markets. Income takes many forms and some are way more lucrative than others.

The first lesson on Income is, if you’re unhappy with the amount you are receiving or the way you are earning it, you need to rethink your perception of income. You need to widen your scope and consider more ways income can be generated. You need to think about generating income in multiple ways, instead of just one or two. You need to reevaluate which methods are effective and which have limited potential. You need to reject the default situation and come up with new ways of generating income.

Income Boosters

Side Hustle – Way back in the early 90s, when I was broke and struggling, a friend offered me a side-gig working sales at the computer shows on weekends. I hated working 7-days a week twice a month, but it definitely put food on the table. Now, there are so many gigs and online opportunities available, it’s easy to find ways that allow you to work the hours and type of jobs you want. Some people just work gigs and forego the day job altogether. My daughter does this and I thought she was nuts. But, she is making it work and has proven me wrong.

Business – Also back in the 90s, I started a small business writing technical manuals. It was tedious and boring work, but it brought in good money per hour. Plus, I could work at night, at my own pace. Most important, my day job paid all of the bills, which allowed me to save most of the business income. I saved up this extra money and used it for a down-payment on my house. Using the side-income wisely is one of the biggest income boosters. If you just blow the extra income, what’s the sense of working so hard for it?

Education – It took many years of night school to earn a computer science degree, but it has definitely paid off for me. There is no way I would have the job I have or earn the amount of money I earn without it. Twenty years ago, a college education was still relatively affordable, compared to now. So, it’s important to carefully evaluate the school, degree and employment opportunities, before making the substantial investment. Working your way through college is a tough decision, but it can be well worth the potential future income.

Investments – Last year, I brought in almost twice as much money from my investments than I earned at my job. If I could do that every year, I would already be travelling the world. But, some years you can lose big in the market. When you average out the ups and downs, investing part of your income is one of the smartest long-term moves you can make. It’s one of the few reliable ways to boost your income and your net-worth, all in one shot.

Cutting Expenses – Cutting expenses doesn’t actually increase your income, but it does free up some of your income for better purposes. It’s also super efficient, because every dollar you save is post-tax, while every dollar you earn is pre-tax. You have to earn roughly $1.50 in income for every $1.00 you save in cost. One of the biggest ways I saved money was driving older cars. I know that isn’t fun or glamorous, but it worked for me. Not only did I save on car payments, I saved a lot on interest, registration and insurance. There were higher maintenance costs, but I was still way ahead by avoiding the payments. If you are struggling to get ahead, think about cheaper transportation, public college or lower rent. Some people are buying tiny houses and skipping the mortgage entirely.

Scale Your Income

If driving old cars and working long hours isn’t your thing, there are other ways to increase your income, that have a much higher potential. By decoupling your income from your direct labor, your income can scale well beyond what you could earn at an hourly rate or salary. If you create a system, a company, a website or some intellectual property, you may not have to trade days for dollars. Instead of teaching students, create a self-paced course. Instead of cooking at a restaurant, create a food or recipe subscription. Instead of coaching one-on-one, create a membership site. I once heard it described as “building a water-wheel once, instead of carrying buckets forever”. For all the talk of passive income, it’s still a lot of work to get it going and there are no guarantees you will make any money. But, scaling does offer the promise of virtually unlimited income potential, so it’s well worth the risk.

Creating Value

I almost didn’t want to bring up the “Creating Value” paradigm, because it is so overused and misunderstood. But, it’s so critical to increasing income, I would be negligent if I didn’t cover it. Most people think a lot about the work they do and the amount of money they receive. What they don’t think about is how much value they create. When they go in to ask for a raise, they bring up how hard they have worked and how talented or reliable they are. What their boss is likely thinking is, “How much money does this employee bring in or cost me and how easy would it be to replace him or her?” In other words, your boss’s perception of your value is very different than your own. You think of your value in terms of effort and they think of your value in terms of output.

How can you create more value and potentially more income? Step one is to make sure any endeavor adds or creates value, before you invest in it. Step two is to make sure people are willing and able to pay for it. It doesn’t matter how great you think an idea is. What matters is how much people will pay for your idea. That IS the value.

Economy of You

If you were the Country of You, how would you manage your economy? How much would you save for the future, invest in people and public works? How fast would you try to grow your economy? How would you protect your economy from catastrophic loss? When it comes to income, don’t be passive. Take control of your economy and increase it wherever possible. Save part of your income to protect you from job loss or unexpected expenses. Invest your savings to increase your future income and net-worth.

The Bottom Line

Income is almost as important to survival in the modern world as food, water and oxygen. Yet, most people spend very little time and effort managing their income. A prosperous life may be just a couple of investments and a side-hustle away.