Maximizing income

There are two types of income: active income and passive income. Active income is an income source that you have to actively work on to bring in money, such as your career or your business. Passive income, on the other hand, is an income source where the money will come to you without you putting in additional active work, such as dividend paying stocks, rental real estates, or royalties from books or inventions.

Most of us will begin our adult life working for an active income, such as our career or business. Our goal is to achieve financial independence by investing our active income and grow our passive income, until our passive income exceed our living expenses.

Maximizing your career income
Career income cannot be converted into a passive income. For those of us who have a job, maximizing our income from our career will provide us more money to build our passive income. While some look for careers or jobs based on the salary level alone, I don't think that is the best way to live life. Remember why do you want to be wealthy. I believe we should live a balanced life, one where we can balance happiness and family with work and money. The best way to do this is to find your dream job:

• Do something that you love and are passionate about - You will work harder, and your passion for your job will show.
• Find a role that fits your talents and skills - You will be better and more efficient at your job.
• Work for someone you admire - You will have more motivation to perform well at your job.

I recommend reading "What Color Is Your Parachute?" (2008 edition, Softcover or Hardcover) by Richard N. Bolles (he also has an excellent website). Richard will guide you to discovering and getting hired into your dream job. Even if your starting salary is lower than your previous job, with some salary negotiation skills, your passion and hard work will lead you to earn the maximum income you can while living a happy and fulfilling life.

Building and transforming your own business
If you do a survey of the wealthy, many of them own businesses. If you have the competence, passion, and entrepreneurial spirit, you can build your own business too. While every business is different, and you need to find a business that suits your talents and passion, you will be better off if the business you start is inherently great. If not, you should try to build the business into a great one.

There are some basic qualities of great businesses:

• They have a simple and understandable business model - You can't manage a business that is too complex for anyone to understand.
• They operate in a stable industry with good economics and favorable long-term prospects - If you're in an industry with poor economics (airlines, for example), the industry's economics will eventually drag you down.
• They have low capital investment requirements.
• They have durable economic moats (or sustainable competitive advantages; some of these aren't inherent in any business and must be built):
• Intangibles assets.
• Brand name franchise and customer goodwill - Brands built through customer experience (e.g. Apple, Disney, Nike).
• Intellectual property rights, such as trademarks, patents, trade secrets, copyrights, regulatory approvals (e.g. Disney, drug companies).
• Regulatory approvals, licenses, and registrations that are difficult to obtain (e.g. defense contractors).
• High customer switching costs - "sticky" consumer advantage (e.g. Microsoft, Computer Associates).
• Network effect (e.g. Visa, Master Card, American Express, eBay).
• Better business model.
• Low cost from lean and efficient operations (e.g. Dell, Southwest Airlines).
• Economies of scale and scope (e.g. Wal-Mart, Proctor & Gamble).
• Better location (e.g. a multi-level parking lot in a city with few parking spaces).
• Toll booth (e.g. Windows and MacOS, you need them if you have a computer).
  
• They do not require superstar managers.

The final quality of a great business is very important if you want to become financially independent. For you to become financially independent, you need to be able to remove yourself from the business. You need to transform your business income from being an active income to a passive income. I recommend reading "The E-Myth Revisited" by Michael E. Gerber. Michael will teach you how to remove yourself from the technical, day-to-day operation of your business by standardizing of your business processes.

Building your passive income
To achieve financial independence, you must invest your active income and build assets that will produce passive income for you.

These passive income producing assets may include:

• Interest-paying bonds and dividend-paying stocks: They are the "easiest" assets to invest in - there are the minimal transaction costs, free information is available online (on SEC's EDGAR), minimal initial investments is required, and plenty of choices are available for these assets. You can also take advantage of the power of compounding with dividend-paying stocks. For both bonds and stocks, however, you need to make sure that the company will continue to be profitable, pay interests, and pay and raise dividends.
• Rental real estate: Real estates can be good investments, if they are cash flow positive/income producing, meaning that the rental/lease income exceeds your costs (mortgage, maintenance, property management, etc.). But youmay need to put in more money and effort to invest in real estate - they have higher transaction costs, information are more difficult to obtain, and larger initial investments are required.
  
• Intellectual property rights (copyrights, patents, licenses, etc.): Intellectual property (IP) rights are harder to come by - you will have to first put in active work to produce IP assets, or pay money in order to own these assets. Make sure you protect your IP rights, so you can earn money from your creativity. There are also other income sources that you can expand into from your IP rights:
  
• Licensing and merchandising (George Lucas' Star Wars franchise).
  
• Writing opportunities (Apple computer creator Steve Wozniak's autobiography "iWoz" is a must read for Apple fans).
  
• Speaking and consulting (Seth Godin's Permission Marketing and Purple Cow propelled him into the spotlight as the marketing guru).
  

(Note: Assets that produce passive income are not the only assets that you should invest in. Non-income generating assets can be worth buying for general investment purposes when they are selling at a sufficient discount to intrinsic value.)

General tips on increasing your income (and success):

• Have an impeccable character - you can't buy trust or respect.
• Keep learning, growing your knowledge, and increasing your skill sets - Read books, take classes, learn a skill.
  
• Be a great communicator - Improve your communications skills, especially writing and speaking.
  
• Ask for feedback and improve.
• Build and use your network.

Related posts:

• Why do you want to be wealthy?
  
• Accelerate wealth accumulation.
  
• Maximize the power of compounding.
• Preparing your financial statements.
  

References:

• "What Color Is Your Parachute?" (2008 edition, Softcover or Hardcover) by Richard N. Bolles.
• Richard N. Bolles's Job Hunters Bible.
  
• SEC EDGAR.
  

P.S. This post was featured in the Carnival of Financial Planning - April 13 2008 Edition at The Skilled Investor.