The Wealth-Building Formula No One Tells You About
Want to build wealth but don’t know where to start? It’s simple: focus on your active income while building passive and investment income streams over time.
1. Active Income Is Your Foundation
Let’s start with Active Income. This is the money you earn from working—your salary, freelance gigs, or side hustles.
Key Point: Active income is typically your most reliable source of cash flow, and the foundation of your financial strategy.
Actionable Tip: Maximize your active income by improving your skills, negotiating raises, or picking up additional projects.
2. Active Income Alone Isn’t Enough
Active income is great, but it’s limited by your time and energy. We all know there are only 24 hours in a day, and only so many working years we each have ahead of us. That’s why it’s essential to use part of your active income to start building passive and investment income.
Example: The Three-Legged Stool Analogy
Active Income: The first leg of the stool—it’s sturdy but only supports you while you’re working.
Passive Income: The second leg—it adds stability and supports you even when you’re not actively working.
Investment Income: The third leg—it’s your long-term strength, ensuring the stool stays balanced for the future.
You’ll notice I don’t include Windfall Income as a leg on our stool: you never want to count on luck as a financial planning strategy!
3. How to Build Passive Income
Now, let’s talk about building Passive Income. This is income that requires some upfront work but keeps paying you long after.
Examples: Buying rental properties, creating online courses, starting a YouTube channel or Etsy shop.
Actionable Tip: Start small—maybe with a side hustle that you research well first. Use your active income to fund these projects.
4. How to Build Investment Income
Next, let’s dive into Investment Income. This is income earned by growing your money through assets like stocks, real estate, or bonds.
Examples: Stock dividends, capital gains (i.e., the profit you make when you sell an asset for more than what you originally paid for it), interest from bonds.
Actionable Tip: Reinvest your earnings to take advantage of compound interest. Even small amounts can grow exponentially over time.
5. How to Balance the Three-Legged Stool
Here’s the strategy: Focus on maximizing your active income first, then reinvest a portion into passive income projects and investments.
Key Point: As passive and investment income grow, they’ll (ideally) start to supplement—or even replace—your active income. Over time, passive and investment income can reduce your reliance on active income, giving you more financial freedom and flexibility.