We focus a lot on saving money and being frugal with our spending. Saving money for emergencies, education, vacations, and the list goes on and on. Most of us do it and it is a very good way to get the finances in order. It helps us get the debt down, pay the bills and financially accomplish what we want.
The problem with focusing only on saving money is that many times we trade saving a penny to making a dollar. In the state of our economy we are lucky if we are gainfully employed however; if this is our only means of income, we are supporting ourselves on unstable ground.
If we only focus our saving based on only one or two sources of income (hers and his) we are putting all of our energy and effort based on the one or two income streams continuing. We can mitigate this by reducing our spending to one income (the lowest) if we have two incomes. This allows us to be able to have a plan A and B. If one income stream gives out, we still have the second which should support us.
Obviously, the more income streams we have, the better off we are if one gives way. This is where cash flow and passive income come into the equation. There are two types of income; active and passive.
Active income is what many focus their efforts on. This is the money we get from working a job. It includes the wages and tips of working that job. The key to this type of income is the word “active”. This means that if you don’t work, you don’t get paid.
Passive income is money that comes in without trading your time for the income. That is not to say that it does not take time however; once passive income is created it continues to produce the income indirectly of the time put in. This means if you get sick, go on vacation, put time in starting another business, or spend time with family money still comes in.
Problems with only focusing on savings using active income:
Inflation – As we are saving active income, we are losing money. Currently, inflation this year has been; Jan – 2.9%, Feb – 2.87%, March – 2.65%, April – 2.3% according to inflationdata.com. Last year, inflation rose as high as 3.87%. So as we are saving each dollar, it is also eroding in value. If we put it in a savings account that is receiving 0.5%, we are losing money day-to-day.
Dependency – Focusing on active income places us in a dependent state for our financial well-being. We are dependent on the job and steady income to make headway in our financial lives.
Health – Active income requires us to remain healthy enough to work. If we lose our health temporarily or permanently, we are not able to work therefore are not able to produce an income.
Time - The most valuable resource we have is our time. This resource is not only not renewable in the short-term, it is not renewable in the long-term as well. Everyone walking the planet only has 24 hours in a day and 7 days a week until they no longer walk the planet. It is the one common denominator we all work with or against.
Energy – We only have so much energy to expel working and creating wealth and/or reducing debt. Although some people seem to have more than others, we all have our limits to the energy we can expel for a given amount of time on a specific task such as saving money or working for an income.
So what does all of this mean? If you create one or more passive income streams, you start reducing the problems associated with active income. By definition, passive income once created does not care about the lack of time you have to focus on money and work, it doesn’t matter that you don’t feel good and stay home from work, it doesn’t matter that you just got back from a four-day vacation and don’t have much energy and you become less and less dependent on decisions made at your job that are out of your control. To read more about passive income ideas check out Passive Income: For When Working Is Not Enough