The 3 Stages Of Income – And Why Not Everyone Will Have It All
There are three stages of income, and if you haven’t already worked it out – it’s important to have more than one of them.
See, 99% of us start our income journey in the same way. We go to school, pursue an education, perhaps venture into university or a trade. We build skills and knowledge in areas we find interesting and then we take that practice out into the job force.
However, this is just one stage of income creation, and in the property investing space it’s definitely not one we want to get stuck in. For beginners especially, it can be hard to move from one phase to the other. The trick is to stay focused on moving forward into a particular stage of income that will provide you with both security and freedom.
Let’s unpack the three phases of income and how they relate to us as property investors:
PHASE 1: EFFORT INCOME
Effort income, commonly known as ‘exchange’ income, is what we touched on before. It’s the income we’re given from working or exchanging our time, knowledge and effort in order to receive a pay check.
Like I said, almost all of us start out our income journey through the exchange process. Now this is perfectly fine for say 10 to 15 years as we’re building a strong savings foundation.
Yet once we continue in this singular income phase for 30 to 40 years, many of us begin to wear out. This is especially true if we’re not exchanging our time and energy in an area we feel passionate about.
It’s clear that most of us don’t want to be caught in the exchange stage forever, or at the very least we don’t want it to remain our only form of income in the future. So how do we break free of the exchange process?
Money management. Understanding that we have to spend less than we earn and invest the difference is the key. It sounds simple enough, but you’d be surprised how many potential investors struggle with the idea.
If you’re one of those people, a good financial advisor can help to revise a budget strategy within your limits – just remember that in order to get ahead later you will have to make sacrifices now.
PHASE 2: PASSIVE INCOME
As a potential investor if we’re able to get our money management in a thriving place, then we can move on to the next stage – passive income.
This phase is all about buying assets and reaping the rewards. There are two main types of assets – dividends and real estate. Of course, we know my all-time favourite is property. As an asset class, this really is where passive income is most notable.
It’s not to say that shares aren’t also valuable, but when you compare the income you receive in the form of reliable rent, versus income from dividends which go up and down more frequently, it seems like a no-brainer for an investor.
Passive income in property really is the sweet spot. As an investor the idea should be to buy your real estate asset and hold onto it forever, because once you own the asset you don’t have to do anything to get those returns personally.
You don’t want to be relying on effort income your entire life because wealth creation is all about giving yourself choices. Whether you prefer to work or not, the idea is that you have the choice to do so – instead of worrying about making ends meet.
PHASE 3: ACTIVE INCOME
At the top of the pyramid sits active income, or what I also refer to as the business or acceleration stage. Most people won’t ever transition into this phase which is completely fine – creating this kind of active income should only be pursued if you have the time and dedication to commit to it.
Naturally the risk here is much higher than passive income no matter what type of business you’re running. Even if you’re making business out of property, flipping or developing houses, the risk versus reward structure is much bigger meaning the potential for profit or loss is heightened.
If you’re planning to strive for the business stage in the future, the best thing you can do to mitigate risk is ensure you implement a solid wealth base with passive income first.
START MAKING MOVES NOW
Moving from exchange to passive income is the most important shift you’ll make in your wealth creation journey.
If you’re a potential property investor struggling to make the jump, you will benefit from our free real estate information nights. Run by our team of expert investing coaches, you’ll learn the best property strategies that will get you in a prime passive earning position.
Spaces are limited and we don’t want you to miss out – book now.
By Jason Whitton
Group CEO Positive Real Estate