What exactly is money for you? It may be the only valid currency that can buy you freedom and security. Or maybe a notion whose only value is potentially endless reproduction, with every cent being able to beget two more under the right circumstances. But for most people, I suspect, money is just a necessary means to get by today, tomorrow, and every other day that we’ve been granted on this earth. And these are not just three views of money. They lay at the base of three types of income – and consequently three different worldviews.
We aren’t going to delve into financial nooks and crannies here. For that, you have specialized websites such as Investopedia. In this article, we are going to cover operable types of income, as well as the most common ways you can earn them. But first, let’s hear a nice little story as a foreword.
A Story About a King, an Explorer, and a Sailor
Back in the olden days of early modern era, there lived a king who harbored an obsession. Not with his illustrious queen, or the thoughts of transience of all worldly things. His obsession lay in deep, dark corners of his treasury. It was his unapologetically materialistic, huge pile of gold that he had accumulated over the years. He made it a habit to count his coins every night, when they would shine brightest. They were the source of his security – not his crown that his relatives could steal, and not his lands that could be ravaged by floods or drought.
One day, an explorer paid a visit to the king, asking for a significant sum of money. Not that it was a loan of any kind, mind you. On the contrary – the globetrotter asked for an investment. The king wasn’t very eager to take up a generous portion of his precious pile and buy a sturdy ship to carry someone across the unknown seas. If the feat proved successful, the investment money would multiply itself, making them all rich beyond their wildest dreams. But if anything goes wrong, the explorer would have to own his mistakes (and possible death), and the king – his losses. So the king refused. The explorer had no other means but to plead with another king, until one (or two) of them said yes.
We all know how this story ended. But there are people in it forgotten by history – among them, a common sailor who was also on that ship. He didn’t invest a dime. His dreams were small. Let’s just try to survive another day without scurvy, he thought. And if we make it to the Indies, I’ll try to shake down whatever surpluses I can, to feed my wife and the young’uns.
The Moral of the Story
Who’s the most potent of these three figures? Whose worldview is the most promising? There isn’t a single or right answer. It all depends on whom you are asking, and what they want from life.
One thing is sure though: nobody would put their money on the sailor. He’s just another expendable chess piece. If he perished, another anonymous pair of hands would take up the oar. His stake was high. But should the expedition succeed, his share in the spoils wouldn’t be proportionate. He would come back home with a stack of cash big enough to maybe allow for a full year of subsistence, yet too small to solve any of life’s problems for good.
And why is that? Because of his worldview. That’s just how he perceived money. He didn’t see it as a source of security or power, nor did he try to tap into money’s self-replicating potential. To put it into today’s terms, he simply used his earnings to pay his bills and order takeout here and there. Just to feel alive for a moment. To get that instant gratification that would make him forget about all that it took to earn it.
The Three Types of Income Our Heroes Chased
So, let’s see what are the three types of money or income that have such power as to make or break any of our heroes’ lives.
Earned or Active Income
This is the most common or widespread type of income in that every single working person in this world gets it. The equation is simple. You spend a certain amount of effort for a number of hours every day. In return, you get money. Since this type of income depends on your capabilities and the time it takes, it’s naturally limited. The moment you stop working or your boss sacks you, the money’s gone. Sure, you can always get another job. But don’t expect it to change your life dramatically.
That’s because neither of these jobs will get you rich. Really, how many people have you met who got rich thanks to their day job alone?
Active earners are much like the sailor from our parable. He’s breaking his back day in and out, but he doesn’t get much – nor can he expect it.
Portfolio Income or Capital Gains
This one sounds a lot better in that you don’t have to break your back from day to day. In fact, the amount of work is nothing compared to the profit.
So does this income just magically flow in? Of course not. You have to bet on it – sometimes quite literally. Stock trading is a classical example of this endeavor. You buy shares in a company that you think could scale up significantly. Then, when it does grow, you sell those shares at a profit.
At the beginning, this game is kinda hit-and-miss, more like a gamble than a proper business. But as time goes by, you are getting more and more experience, minimizing your losses.
Obviously, you have to have some money to invest upfront, which is the main reason why not many people are willing to try it. Another reason is that the risk can never be fully mitigated.
Our explorer knows it fully well (as does the king who funds the voyage). Every journey he embarks on is paved with risk. If he makes it alive, he will have not only the profits, but also a portfolio of assets (or skills) that will raise his game to another level.
It’s not for the faint of heart! But if he makes it past 40 years of age, he’ll likely be able to retire and live off the rest of his life in relative security, somewhere in the Bahamas.
Passive Income (A.K.A. a Dream Come True)
These days, passive income has gained more die-hard evangelists than any other type of income. Indeed, it’s impossible to argue against its premise, which is earning money from assets and not actual work. Yep, you just sit on your rear end and enjoy life as money pours down on you. Thousands of websites, books and podcasts are dedicated to this topic alone.
So why isn’t our world full of billionaires? Because it isn’t as simple as all those self-proclaimed money making wizards would have you believe.
They usually leave out an indispensable part of the equation. Namely, that it often takes immense effort and grinding to convert simple work into saleable and re-saleable assets.
An example could be writing a book. Today, it will eat up every ounce of effort you throw at it. But once you’re done with that, you can recline in your armchair and never work a day in your life. That’s because you’ve made a business that scales itself up every single day. Don’t believe it’s possible? Ask G. R. R. Martin. First he made a fortune off of his epic fantasy novels. Then, he sold the rights to HBO for the TV series. As well as the rights for a prequel. Which will probably be followed by a sequel before long.
But you don’t have to go epic to generate passive income. If you own a property and are renting it, that’s also an example of (a small-ish) passive income. Buy a house and sell it for more – that’s portfolio income. But if you buy four houses and rent them till the end of your days, that’s passive income alright.
So Who’s the Winner?
Back to our story! The winner would be the wise king who decided to invest money in the exploration AND harness its results to build a serious business. A business that would expand and grow to become one of the most powerful states in the world.
Naturally, politics and power struggles interfered, and many other kings followed suit. But the pie was large enough for everyone to grab a giant slice of it.
So, the kings and queens got their lands and assets. The explorer got his glory and a page in every history book. And the sailor got nothing. Fair or not, that’s how the world works.
Granted, not all of us can be kings or queens or explorers. But thanks to the internet, we can at least supplement our income or create some passive income to keep us relatively safe. You can even do it with a simple blog. Anything but meaningless grinding from dawn till dusk that wastes away your talents without creating (or even replicating) any value.