Wealth Tip 8: Earned Income is Sugar

There are three types of cash flow: active cash flow (aka: “earned income”), passive cash flow, and residual cash flow. Most people in our culture focus on increasing their active cash flow, either by finding the highest paying job they can, or by actively working to grow their business. While the goal of increasing your active income is laudable, rarely will it by itself lead to financial freedom. In fact, earned income is one of the worst predictors of financial freedom.

Why is that? Because with additional earnings most people in our culture step up to a more expensive lifestyle. In fact, they don’t just spend the additional active cash flow on one time purchases, but rather they often buy things that bring with them a much higher fixed cost of living. This includes things like a more expensive home or a fancier car, both of which bring with them many years of higher monthly payments.

Earned income is sugar. It is empty calories that may sustain you for a moment, but soon burns through. What is the way out of this trap? To focus on creating on the other two forms of cash flow—passive cash flow and residual cash flow.

For more on the three types of cash flow and creating passive income see, The Maui Millionaires, pp. 167-190.