Note: this article is a little off subject for the site but it’s a really basic response to some of the kinds of questions I’ve been hearing from students. If you’ve enjoyed this article then please let me know so I can produce more of it. Better yet, ask a question in the comments.
For better or worse, money is a score.
It’s a method some people use to compare winners from losers.
It’s often the difference between respect and disdain. It’s always the same with this stuff:
If you’re poor then you’re strange. If you’re rich then you’re eccentric.
If you’re poor then you’re a failure. If you’re rich then you’re a success.
If you’re poor then you’re pushy. If you’re rich then you’re a leader.
Wealth is a game… but it’s one that will have a huge impact on your life.
I’m not here to discuss the good or bad about that. I’m just making sure we’re all swallowing the same dose of reality here… making money matters.
When I was a child, I would spend dozens of hours a week playing video games. Every second I wasn’t in school or being forced to do something else by my parents –
I’d be burying myself in Final Fantasy X.
Or I’d be grinding a few hours of Tony Hawk Pro Skater. (What ever happened to those games anyway?)
I could play run circles around the CPU in Madden for hours and never get bored with it.
But as you get older, things change. Some for the better, some for the worse.
I was talking to a childhood friend the other day and I said something,
“Games just aren’t the same, man. I could play them for days straight when I was younger but now… it just feels like such a drain.”
He nodded and was like, “I know what you’re talking about. It’s just different.”
What High Score Are You Chasing
One of the biggest differences between video games as a child versus now appears to be money.
When I was a kid, I had my parents keeping food on the table. I didn’t ever have to work to get by. Sure… I had to work if I wanted to buy something extra once in a while but it was never a part of the lifestyle. I just got to play all day.
But, I think we all understand, we can’t live in a world where everybody gets to play all day.
Someone has to grow the food.
Someone has to keep the electricity going.
Someone has to program the video games.
And, only after that, is there any room for playing video games, right?
But how does society do it?
Here we are… billions of different people with different skills, goals, and dreams… not only keeping this whole mess running but also innovating new things (that future generations will want to keep running.)
How many people need to grow food? How many need to work on electricity? How many should be innovating? And how much room do we have for people playing video games (hint: my answer is, lots of room for those that really want it.)
Money is a tool we use to organize resources.
If there is too much food growing – prices go down. That makes less people want to produce food. If there is too little food growing – prices go up. That makes people want to produce more food.
And the same simple equation is running with absolutely every resource we have. (Though there are some complications society likes to add in.) Breaking it down, that’s the ultimate solution to all these problems.
People exchange money (which is really just access to more resources) for producing resources for other people.
The more resources you produce, the more options you have. (You can exchange those resources for money, or you can give them away, or you can keep them for yourself.)
So… whenever you want to make money… it’s often better to think about the more direct approach… how can you produce resources?
(There are other ways but most of them are ways I wouldn’t recommend for a number of different reasons.)
The (Main) Classes Of Income
When I used to bury myself in RPGs, I’d almost always be working to get a white mage/healer into my party. They were a class like no other. Sure… all classes have their advantages but having a healer kicking around was almost always a really good thing.
1. They can save your butt if you’re a little underleveled for a tough battle.
2. You don’t have to retreat from a dungeon just because you’re a little beat up.
3. They’re usually way cheaper than healing items.
4. They still aren’t completely useless when your health is high.
But every class has its advantages and disadvantages.
Money works in that way to…
There are different classes of income that you can earn. Each of them have distinct advantages and disadvantages that you need to account for while you’re working on them. (And just like an RPG, occasionally you need to do a little grinding.)
Take note: I’m going to be discussing the broad categories here. They can be broken up into more specific classes too. If you want to dig into the details in the comments then I’d love to talk about it.
Active income – it doesn’t take money to make money
I hate the line, “it takes money to make money.”
It’s such complete BS and anyone that thinks about it for 20 seconds knows that’s not true. Homeless people literally walk down the streets in the US carrying shopping carts full of bottles and cans to redeem for 5 cents a pop. Sure… it’s not good pay but it disproves this “takes money to make money” theory.
In fact, virtually everyone in the world today makes money without having to pay money. They have these things called – JOBS.
Sure… it helps to have $30 bucks for a pair of pants and a throwaway phone but there are always people willing to pay you for giving up your time.
That’s active income.
You trade your time for money.
There is a ton of value in that. Your time is one of the most valuable resources you have (probably the most.)
And it’s the class of money that money people spend most of their time grinding on.
They go to college to get a good job. They work hard to get promotions. And they keep that process up indefinitely. It’s a little bit grindy but it’s a sure-fire warrior class to success.
But… there are limits to the active income you can make.
You only have so much time in your day. More importantly, you only have so much energy. You can’t work a job 24 hours a day. You need to sleep. You need to eat. And really… even if you could… if you don’t have time to have fun in life, what’s the point?
Active income is usually the best way to start but if you don’t get another class of income into your party then you’re setting yourself up for a long grind.
Passive income – it’s like getting a mage into your party
Passive is income that you don’t need to sacrifice your own energy to produce.
If you write a book and have someone else give you royalties for every one of your books they sell – that’s passive income.
The book is already written. As long as the other guy is doing the printing and selling of the book, all you’ve got to do is collect the paycheck.
To you, it makes no difference to your workday if the other guy sells 1 book or 10 million books, you still don’t need to work. You just make more money for each book sold.
That’s the good thing about the passive class of income.
You only have 24 hours in a day but you don’t have to give up a second when you’re producing passive income. You can, more or less, make as much money as you can imagine.
Keep in mind: even magic has its limits. You only have so much MP and the spells only last so long.
You still need to give up resources to write the book. You still need to expect, someday, that book might stop selling. And quite frankly, most books never sell 10 million copies, so for every winner you need to expect to write some flops.
But writing a book isn’t the only passive income.
Most traditional employees attempt to produce passive income through stocks in their 401k.
Stocks, Bonds, And Passive Income
Stocks are just buying tiny little pieces (shares) of a business. If that business produces an income they can share it (dividends) with their owners (stockholders,) and that becomes their passive income. (Also, the value of those shares can grow and be sold to produce passive income.)
Bonds are just giving loans to businesses and they give you an income for those loans. (And you can exchange those loans with other people. That adds complexity because the value of those bonds change in value based on the businesses ability to pay them back.) The important part: just another way to get passive income.
This is usually what people are really referring to when they say, “it takes money to make money.” The more correct way of saying this would be, “the more money you have, the easier it is to scale your income.”
But, of course, still…
It would be a pretty crappy game if all you have to do was buy stocks to get rich.
Stocks can collapse in value. (Just the other day the market lost a quarter of its value and it’s still looking pretty shaky.) In some sense, you’re just trying to make smart bets with your money.
If you bet wrong, you can be worse off than the guy working for active income. You can be flat broke, have no job, and go years without developing the skills to make an active income.
It’s kind of like when you level up all your spellcasters just to find out the next boss is immune to magic… It kind of makes you wish you leveled up your Barbarian a bit.
Or… it doesn’t matter how hard you try to tackle that Gastly with a Ratata… it ain’t gonna’ help.
But there are some tricks to this game of money that make it easier…
A lot easier.
It’s a trick that 99% of people have heard of but never appreciate the value of.
It’s called compounding.
This is the trick that most people use to get rich.
Most people won’t get a job paying hundreds of thousands of dollars a year. And if they do, it will take them decades of grinding.
Most people can’t write a book that millions of other people want to read.
Most people won’t think up that million dollar idea.
But everyone can produce massive results if they’re willing to take advantage of the power of compound interest.
It’s funny to think…
When I was just getting into stocks, my first few years, I was making 20%+ interest every year.
As an investor today, I look back in awe because I’m super happy getting a consistent 6% return today.
But the reality is, that 20% a year barely added up to any money at all when I was nearly broke.
20% on $1,000 is an extra $200 a year.
It doesn’t look like much…
20% on $100,000 is an extra $20,000 a year.
That is like having a job that you never have to work.
And, of course, this is the thing that makes wealthy people super wealthy…
20% on $1,000,000 is $200,000 a year – more than virtually all regular employees make working long weeks.
Now just think about the effect this can have on billionaires.
There are different classes of income.
You may not like the game but it’s an MMO(ffline & Online) game that’s played around you every day. It’s up to you how you want to approach it. But, at the very least, I suggest you know how it’s played.
If you want to learn about anything else related to this then please ask questions in the comments. (If you’re wondering it then someone else probably is to. Do them a favor and ask it.)