Ep 260 - The Scale of Active Income to Passive Income

Hey everybody. Flip and Danny here, as well as Ben, welcome to another episode of our podcast, when our podcast is called Freedom through Passive Income.

That's right.

And we do have our special guest Ben here with us today. This episode is called the Scale of Active Income to Passive Income.

Yeah, I always get excited when you're here, so let's roll into it.

Ben, Fantastic. Last couple of episodes we've been talking about keeping track of where you are in life. Today we're going to talk a little bit about keeping track of what type of income you have because that can make sure that you're happy ending financially. You realize what transitions may have to happen. So the first type of income that you have is commission only. In this type of income, you are paid only for the results that you create. I believe on the ship, yes, it was pretty much commission only. Oh yes, they had no benefits for us, except anyway, commission only on that. Now, commission only can be a great thing if the commissions are big enough and if they're frequent enough. So some the listeners might be have big ticket items that you're selling that the sales are frequent. And the idea then is to be able to set aside enough money from that because when the commissions end your income. The second way of making money most people are familiar with is hourly wage. This is time for money. Yes, you give X amount of time, you get X amount of money on that. The third way is salary. Salary assumes time for money, except that oftentimes in salary, they, once they make that assumption, they expect you to give more time than what the agreement was. So it's kind of like this is basically how much money we're going to pay you. We expect you to have this much. But if there's anything extra we need you to do because you're on salary, you should do that. So a lot of people are on salary. The great thing about that is that your hours are pretty much guaranteed. Even if you're sick, even if you're on vacation, you can really count on what your hours are going to be as opposed to, for instance, if you work at a grocery store, you have to go in and look at the schedule each week and see how many hours you were scheduled for. So it gives a greater consistency to it. The next level or type of income is salary benefits. Now, not all salary has benefits, correct, but benefits of salary would include their health insurance. It can include your 401k savings, which is paying you for work you do now. But they're setting aside money and 401ks that you can spend later. So that's a great benefit. Pension is another. It's becoming less frequent now. People have. Pensions are more rare. But pensions are another way in which you work now, you get paid for now, but you're also getting paid for accruing credit for this pension that's going to pay you in the years to come. So here's the tricky thing about pensions though, will they. And it's good for you during your working years to be able to check and make sure what happens when the person who is earning the pension dies. We have neighbors of ours, Bob worked from the Dow 30 companies. He was hard worker, good worker, skilled worker, had a great pension. Unfortunately, about four or five years into his retirement, he got sick, died, his pension stopped.

Oh my goodness.

Wow.

So here he is, his wife in her mid to late 60s lost that income. Lost a tremendous amount of income. Wow. So they still had some 401k and whatnot. But that's one of the catches about pension that make sure you're aware of for that. The same thing would be true with annuities. What happens if you have one person has an annuity, does it cover both of you? So if you do have a pension, some type of pension from work during your working years, it's good to check with hr, see if there's an option to maybe pay you less pension. But you both get paid the pension as long as you're living. So that's one option to be able to pursue. So so far we've got commissions, hourly wage, salary, salary, benefits. The next type of income is business ownership. Was it quite a. When you went from cruise ship commission only and you started into real estate as an agent, that's commission only.

Yes, commission only.

Yeah. And then from there you went into starting a business. So have you ever felt like, and I mean the business may pay you salary, etc. But did you. Do you always feel like you're still on commission only kind of?

Yes, yes, 100%.

There's really nothing reliable about what we're earning. Our business has to perform in order for us to make money. So it's that same mindset of you work for what you get and if you stop working, you stop getting. So in that mode and frame of mind, it was for us to be sustainable and keep on getting while we stop working. It was to build the machine and the people behind the machine so that we could keep stepping out and delegating those leadership responsibilities up and the machine still works and we can still get paid and. Or what we're doing now just building another business.

So it's really, in a way, it's like two stepping. The commission process, where now you personally don't necessarily need to perform as a business owner in general as you grow your business, but you need to make sure the machine is performing.

Yes.

Because that's the commission part of it. And so for those of you that are there employees, there's a great benefit to being an employee in the sense that if you work for a large company or a company that is sustainable, you don't have to deal with the responsibility. And the responsibility is not to be underrated, right?

Yes.

Yeah. So there's great rewards for that. But in the end, it's like this trade. And I think a lot of workers are better suited to be employees because it's not really in their nature to want to be in control of everything and have the responsibility would be fun for them. Other people, it's like, you know, I don't want to put my fate into other people or I would rather just have be able to go at my own pace. So a business is what's best suited for me on this. Now, the point of the key takeaway for this particular podcast is that all these ways of making income, commission only, hourly wage, salary, business ownership, whatever it is, they all lead. They're the machine, so to speak, to create your passive income, you might get a little bit of Social Security just by being here, which the government does, but for the most part, the really livable part of Social Security, which is the beginning of this or any other type of ongoing income, whether it's 401, whether it is the passive income that we're about to talk about here, it's these other forms of income that will feed that.

Yes.

Would you agree with that?

Yeah.

So it's kind of like we go back to this Act 1, Act 2. Act 1 is coming of age. Act 2 is your earning years, the great adult adventure. That is what creates, you know, we generate our income producing skills so that we can create the income that either indirectly through Social Security or directly through our investing, creates the passive income that supports us in the third act.

Yes, exactly right.

So that's the connection I want to make for us and for those of you that are in Act 2 still these 20s, 30s, 40s and 50s, it is easy to stay focused on what could be very good income for you and giving you a very good lifestyle. And yet by nature, unless you own the business that you'll continue to own, those active forms of income are going to come to an end someday.

That's right.

At some point, as an employee, the company will probably say to you, there might be a few exceptions, but at some point, the company's going to say to you, okay, it's time for you to retire. And if you're selling, you know, or commission only, it's possible if you go a little bit longer, perhaps in certain types of selling, but all these forms of income stop. And then you end up with, which is the theme of this series, that passive income is the end game for all of us.

Yes.

So as you think about whatever forms of income that you're enjoying right now, what is going to happen as you move into the third act? What will it mean to you? How will that be reduced? And when that active income finally starts to come to an end or significantly reduced, what's the passive income that you're going to have? Because as we talked about in previous podcasts, the quality of your life in Act 3 is the amount of passive.

Income that you have that is 100% correct. And we are a living example of that because we got 50 and went, whoop, where are we? Where are we on our journey? And, you know, thankful to be where we are. But had we, we could have easily been in another circumstance where we weren't planning well enough. And I think that that's, that's the power behind these episodes. So thank you, thank you, thank you for this, Ben.

Yeah. And they say that in my life, I have the ability to always have the wrong time for the right situation. And I'll explain this by saying that I heard the other day that. So I turned 50 in 2020. That means that in 2035 I'll be 65 years old. And I heard the other day that if nothing changes, the Social Security administration will be out of money by 2035, just in time for me to retire.

You get zero.

I'm in the wrong place at the right time again. Oh, well, we hope that you enjoyed this episode. Make sure you're heading on over to our website, freedomcapitalinvestments.com to join the investor club and make sure you catch all the stuff that we're doing behind the scenes and also make sure you're checking us out on all of the social medias as well. But we like to end all of our episodes with Invest Smart, Live Happy. Bye, everybody. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice, opinions and information. On the show are not guaranteed. All investment strategies have the potential for profit and loss.

Sam.