I heard recently on a podcast that there's a huge gap between earned income and having an asset. And sometimes, it can be a difficult task to bridge the gap between them, as in turning an active income stream into a passive income stream.
Within the context of that discussion, building long term wealth was the main theme and one of the key highlights was it can never come through earning a salary, at least for the average person.
Now, in our modern age, earned income has expanded beyond just having a salary.
But the basic principles such as time constraints and the proverbial ceiling on how much one can earn actively more or less still applies.
Of course, we all want our money to work for us, to do the heavy lifting pushing us from one financial bracket to another. In many ways, it seems more beneficial than solely relying on earned income.
The general idea here is that wealth accumulation is more sustainable and scalable when income is generated passively.
In my view, however, especially during the first half of building wealth, an approach that combines both active and passive income streams is a more effective strategy for long-term wealth accumulation.
Sometimes, we move too fast into building passive income when we haven't established a solid foundation on active income. It's more or less like trying to take a shortcut and I'm definitely guilty of this.
For me, after stepping on the gas for some time, building momentum, there came a moment of realization. Active income is akin to driving a car at 90mph.
I'm in control, pushing my limits, and the speed at which I earn is directly tied to my effort and time. Since it's high risk, one wrong move can effectively create burnout or financial instability.
Passive income, within this same analogy, can be pictured as a self-driving car moving at 40mph. Putting in the initial effort to set up systems or investments that work on their own.
And it requires less maintenance, offers lower risk, and provides a sustainable pace for wealth accumulation.
Sometimes, my issue with the latter is that it feels like you're moving at a snail's space in an environment that's rapidly changing.
That said, over time, the steady, predictable movement can cover a lot of financial ground, especially if it can keep functioning for a long duration of time.
Now, as a thought experiment, what happens if we combine both, as in having a semi-autonmous car that drives at 130mph?
Well, for one, the potential for wealth accumulation is significantly higher. And there's an option for a more aggressive approach to financial growth without compromising on sustainability.
Of course, a healthy risk management is equally important, because one can't afford to neglect the underlying systems and investments that power the passive income stream.
Secondly, which is my favourite part, speed and flexibility are significantly enhanced. In theory, the active income creates an initial thrust that the passive income can sustain and build momentum on, more or less achieving a dynamic approach to wealth building.
Thanks for reading!! Share your thoughts below on the comments.
