Each year, Forbes magazine shows the distribution of net worth for the United States. The Forbes graph shows that 86% of the people make $250,000 or less each year. Yet, this constitutes only 26% of the net worth pie. Only 10% of the population makes more than $350,000 per year, yet that 10% is controlling 68% of the net worth of this country!! These statistics are not meant to upset you. I would however like you to keep them in the back of your head as you read through this guide.
There are a few things you should know. First of all, the term “Net Worth”. What exactly is that? Net worth is simply the sum of assets minus the liabilities. This, however, simply does not state the whole story. So you understand how most of the money is made in America. Most people make their income linearly, which means they have a “Linear-income”. This simply means that for every hour they work they get an X amount of income. With a linear-income a person must keep working if they want to keep getting paid. In the United State the average person works a 40-hour workweek not to mention all the other time spent away from the home due to having to work. Let’s say that the average is 50 hours per week. If you consider that the average person gets 2 weeks of vacation, you will see that 2500 hours per year are spent on the job. Take those hours over the typical 45-year work span, and you will have worked 112,500 hours!!
Residual Income is income that keeps coming in month after month, year after year, from work you do just once. An example of this is income received from stocks or government bonds. It keeps coming and you don’t have to work for the government. Another example is a royalty paid over the rights of an invention or a song. You keep receiving income for that song and you don’t have to keep singing every time to collect. The best way to build your financial freedom is by securing residual income from many sources. Now, to clarify, not all residual income is passive income. In fact, most residual income has some “residuality.” Don’t try looking that word up in the dictionary – it is my own creation. The residuality of an income source refers to the extent that you have to put effort into establishing a cash flow. Some forms of residual income are labor intensive in the beginning, some in the middle and some at the end. I do not believe in completely passive residual income – you should always have control and take charge of all of your income sources.