There are many blog posts, books, and podcasts out in the world celebrating “passive” income. I've even got a partner blog in the WCI Network completely dedicated to passive income. It's time somebody stood up for the other side — active or earned income. Is it really all that bad to have earned income? Of course not. Let me explain why.
# 1 It's Called Opportunity
Thomas Edison famously said, “Opportunity is missed by most people because it is dressed in overalls and looks like work.” Earned income is different from passive income in that it requires no capital. It gives you the chance to pull yourself up by your bootstraps, make something of yourself, and build some wealth. If you think work is a bad thing, ask someone who can't get any. Earned income is, well, earned. You trade a portion of your life, energy, and time for it. But you don't need any capital to do it.
# 2 Work Is Good for You
It turns out that working is a good thing, despite its reputation — “It's called work because they have to pay you in order to get you to do it.” Work builds muscle, builds brainpower, teaches new skills, slows dementia, and provides a sense of self-worth. Without work, there is no recreation. Without recreation, enjoyment is decreased.
# 3 Unemployment Decreases Happiness
Want to be happy? Don't assume the way to be happy is to stop working. The data is quite clear that the unemployed are miserable. Here is an excerpt from HBR's World Happiness Report on the subject:
One of the most robust findings in the economics of happiness is that unemployment is destructive to people’s wellbeing. We find this is true around the world. The employed evaluate the quality of their lives much more highly on average as compared to the unemployed. Individuals who are unemployed also report around 30 percent more negative emotional experiences in their day-to-day lives.
The importance of having a job extends far beyond the salary attached to it. A large stream of research has shown that the non-monetary aspects of employment are also key drivers of people’s wellbeing. Social status, social relations, daily structure, and goals all exert a strong influence on people’s happiness.
Not only are the unemployed generally unhappier than those in work, we find in our analyses that people generally do not adapt over time to becoming unemployed. More than this, spells of unemployment also seem to have a scarring effect on people’s wellbeing, even after they have regained employment.
The experience of joblessness can be devastating to the individual in question, but it also affects those around them. Family and friends of the unemployed are typically affected, of course, but the spillover effects go even further. High levels of unemployment typically heighten people’s sense of job insecurity, and negatively affect the happiness even of those who are still in employment.
So while most of us want to work less, not working at all is unlikely to be nearly as great as we imagine it will be. Even retirement is a mixed bag. Recent retirees are nearly as likely to say their life is worse than before retirement (28 percent) as better (35 percent). There are a lot more benefits to earning an income than the income itself.
# 4 Higher Rates of Income
Here's another important benefit of earned income, particularly for readers of this blog: it pays more. A physician or similar high-income professional may be able to earn at the rate of $100, $200, even $500 an hour. As much as $1,000-$6,000 per day. Good luck finding a source of passive income that will pay anywhere near that much any time soon. More likely, it will take you twice as long to get passive income anywhere near that range. It all spends the same, whether it came from dividends, rents, or your paycheck.
# 5 You Get Social Security Credit
One of the biggest downsides of earned income is that you have to pay payroll taxes, such as Social Security and Medicare taxes. That's not all bad though since there are actually benefits associated with paying these taxes. The more you pay in Social Security, at least until you've paid the maximum for 35 years and particularly up to the first and second bend points, the more Social Security will pay you later. You also want to get your 40 quarters of Medicare taxes in at some point. It doesn't matter how much passive income you get, it isn't going to increase your Social Security benefits or count toward Medicare.
# 6 Far More Likely to Work
A well earned catfish.
Many attempts at increasing passive income are get rich quick schemes that simply don't work. But when you go to earn income, it works and works well. In fact, it works very well for a high income professional. Becoming wealthy as a physician is as simple as finishing your training, getting a decent job, carving out 20% of your gross income for wealth building, and investing it mostly in index funds, mostly inside retirement accounts. You don't have to buy income properties. You don't have to start a blog or write a book or develop a new product or get a patent. You just have to go see patients (which presumably you wanted to spend your life doing when you applied to school back in your 20s) and save a little money.
# 7 Passive Income Can Also Be Passive Work
A lot of people who go out looking for passive income discover that it usually isn't passive at all, especially in the beginning, and it isn't even guaranteed to provide income. It wasn't until the fourth year of this website that it started providing any kind of significant income justifying the amount of time I was putting into it, and there was no guarantee that it ever would. 95%+ of for-profit blogs never make any sort of livable wage. It's the same with most types of passive income — a ton of work must be put in up front, and there is risk that the income will never be there. Earned income is initially higher, more consistent, and far less risky.
Earned income might not be on Kiyosaki's favorite side of the Cashflow Quadrant, but it is nothing to scoff at. It certainly has a place in your life and is likely to be the most important piece of your financial puzzle, both for feeding your family and building wealth.
What do you think? Why does passive income get all the press? What part does meaningful work play in your life? How do you expect retirement will affect your happiness? Comment below!
I definitely appreciate the value of a high hourly wage.
But isn’t the beauty of passive income that it can pay quite a bit, oftentimes for no work at all? It could be a syndicated property for which you’ve already done the research and invested or an owned property you manage but with little time investment and a good tenant. Of course, issues will arise from time to time as a landlord but even the average property has months with no hassle.
Granted, you need the money from somewhere to get the real estate investment.
As PIMD alluded to, though, tax code favors passive income in many ways.
Active income has its plusses for sure as there is no way I can ever get a passive income stream to match my W2 salary ever.
There have been reports published about the risk of early retirement (more likely to die than those who retire early for instance) and you touch on a lot of the rationales for this in your post (loss of social interaction, mental stimulation, etc).
That is the reason it is important to retire TO something and not FROM. Have to plan to keep your mind and body active after retiring so that you don’t go into a downward spiral.
That happiness report excerpt sounds interesting about unhappiness being unemployed. Did they make the distinction of voluntary unemployment (ie FIRE crowd) vs forced unemployment (which could explain a lot of the findings if this distinction was not made)?
No, I don’t think they considered the FIRE crowd to be unemployed.
I got rich and to financial independence by killing it at my day job for over 20 years (and of course saving and investing). But the income I made and the promotions from working hard paid off. I “front-loaded” my career so I could enjoy life more at a still young age.
“Plough deep while sluggards sleep” – Benjamin Franklin
Personally, this is the way to do it. Accidental FIRE got it right.
Budgeting is an absolute must for everyone, but at the end of the day, those fancy apps and spreadsheets are never going to generate more income or take away certain (fixed) expenses.
But if you advance your career with coherent and progressive moves, your income with grow by leaps and bounds to the point where you don’t budget anymore. You simply have an idea, at this point, of balances here and there. It all depends on when you want to sacrifice in life, because there is no escaping it. Work hard early on and sacrifice quality time or later on? It’s a personal choice.
Well done Accidental FIRE, I am mirroring your approach.
Thanks very much!
Earned income does provide a lot of benefit. And any of the passive income I’ve tried to build so far has certainly been more active than passive.
I don’t, in particular, look forward to early retirement. Not complete retirement. I do, however, very much look forward to partial retirement where I cut back to part time and work 0.5 or 0.7 FTE and get a couple of days off work each week to focus on other interests outside of my earned income gig.
Because I like my W-2 gig, I’ll likely always work to some extent. At least enough to maintain my benefits. There is nothing that can quite replace the feeling of putting work in during the day and the satisfaction that comes from feeling like I’ve truly helped someone that day.
TPP
There are other benefits to actually working as opposed to living as a rentier:
1. I think it sets a better norm for your children, especially when they are young. You have to do something you don’t always want (eg Monday morning) to get something you do
2. It gets you a chance to interact with many types of people who live in the real world.
3. Physician work is my calling and a privilege. There is a special joy when taking care of patients through thick and thin. In cardiology we get the chance to build long term relationship s with our patients, their families,and even the community at large. Of course, I don’t feel that way when charting, and it would be nice if some extra passive income can take the foot off the accelerator some day.
Since you asked…one missing element of the analysis is independence. No surprise people who have work are happier than those who don’t since they have the options provided by the income work brings them. The flip side appears obvious. The allure of passive income is true independence (i.e., not just absence of a boss, but money to do what they want). Now, I’m all for meaningful work. But that can come in a lot of forms, some of which are not paid income. But for most of us first comes the need to earn, save, and invest our way to financial independence.
Yes! I was afraid PIMD and those 8 8-hour shifts a month were making you soft. A medical degree is the golden ticket. There are few (legal) professions where you can make $1,000+ a day without breaking a sweat. I’m all for passive income, but at the end of the day what I really care about is total income. We are lucky to have a profession where we get to help people while earning more respect and money than most people ever dream of.
This is just the comment and motivation that I needed to start my day on the right foot.
Me make Jim soft? Never haha…
We are lucky that we have a career that isn’t just something that we do, but really defines who we are as people. What the passive income does however is that it allows you to practice as close to “pure” as possible – for the privilege of helping people. People seem to make different decisions when finances are a huge driving force.
Unless you inherit money earned income has to come before passive income. I plan to continue working at least part time to keep retirement accounts and passive income increasing and because I enjoy most parts of it. Working some with reasonable time off is a nice mix. And with the new QBI tax rules, even more beneficial. I also agree it helps keep your mind sharp & focused.
Thanks for this article! I recently had some uncertainty at my current job which made me appreciate how thankful I should be for having a job as a physician. “
I’m surprised that you would consider WCI passive – don’t you treat profits as earned income? It seems to me you’ve worked your tail off to get where you are. Would also add that earned income allows you to fund tax beneficial retirement accounts, such as 401k/403b’s, IRAs, and Defined Benefit Plans. Passive income won’t let you do any of that. Thank you for standing up for the working wo/man.
Parts are passive and parts are not. By IRS definition, my salary is earned income and the distributions are passive income on which I don’t pay payroll taxes.
Awesome article! I make a fraction blogging etc compared to my “earned income” job as a dermatologist. I wonder everyday how much time to spend on this side project when I can make sooooo much more as a derm. FIRE for docs is totally achievable with just “earned income.”
I will take both, thank you very much!
I have reached FI but still work for many reasons. Money is a tiny part of that. For me, it is more about the structure, the social interaction, the benefits and opportunities, living up to my human potential, and serving others,
I consider most of my investments passive, but blogging is “semi-passive.” Online work can produce residual income and at a favorable tax rate, but it will diminish fast without constant attention.
Great post! Earning power is the biggest wealth builder for physicians. At first that is as straight up income and later as investment income from investing that captial. In Canada, investment income is more tax efficient than earned income. So, making that transition to investment income is key.
I think there are some barriers like those that this site tries to overcome: spending too much, not investing, or investing with high fees. One area that is critical for Canadian physicians is paying attention to their business. We are mostly fee for service small business owners. I know a number of physicians with the same practice type at the same hospital and 10-15% difference in revenue (15-20% difference in net revenue). They work the same, but the ones who put even minimal attention into their business make way more.
-LD
Passive income (other than treasuries and other risk free assets) still entail risk taking. Rentals can sit empty, dividend stocks lose capiral, dividends cut).
Active income is risk free (once earned). You are first in line in bankruptcy. Having a stream of active income allows you to take more risk in your investment portfolio.
I like the idea of earned income being more in my control, the more I work the more I earn. Relying too heavily on outside forces (the market, renters, etc.) that don’t quite reward me for working harder makes me uneasy
FIRE here, but after realising all this:
– spouse will increase (pension) income if I die while mine will drop 50% so maybe I shouldn’t lose my credentials before age 60. (He has no intent to resume medical work and says “No I didn’t go into medicine to help people, I went into it to have enough money to retire well, and early.”)
– I will do more for the world working as an MD than the 3+ volunteer jobs (2 of them nonmedical) I have been doing not very effectively.
– re aforementioned volunteer work: a fulltime job is a great alibi for shedding committee doings or refusing any new work there.
So I am taking the plunge back into the working world Monday am and if I couldn’t have it all- TSP, FTCA, AND parttime- at least I got 2 out of 3 (no parttime option). If I continue for >= 3 years (and I hope to work til I’m 70- 15 more) I’ll get that pension US Senators and Representatives can get for working only 5 years. And get credit for my Army years from back in the day when the military had a 20 year vesting period and no return for any less than that. I expect to do more for my volunteering agencies by donating money than with my few hours a week with no control, not always a functional organization, never a fun thing 100% of the time, and of course no pay.
So I’m proof that not all retirees are happy enough to remain retired.
What seems to be forgotten by those aspiring to be early retirees is the status that you lose when you become a retiree. You no longer have the same status that you did when you work.
Also, volunteer work is rarely as satisfying as you would like it to be. You just don’t get the same recognition or the ability to have the same imoact.
Don’t get me wrong, I am glad that retired from a corporate finance position at age 53. However, it is not all a bed of roses.
Great post. The “day job” provides a virtually guaranteed income at a much higher rate and return on my time compared to just about anything else I can do, at this point in my life. I do not have the interest or stomach for real estate nor the overall entrepreneurial nature.
Awesome post as usual! May I suggest a #8? Earned income comes with healthcare benefits (for most docs, anyway.) When I read about high income professionals afraid to pull the “RE” trigger, it very often boils down to fear about how much healthcare can cost.
(A little odd that I’m the one to post about this, since after I hit my 20 years I got the right to Tricare – not perfect, but pretty good coverage for someone with decent genes and on no meds at age 54. Interestingly I am coming up on my “Mandatory Retirement Date” in 2020 where I will be kicked out of the military, I hit “FI” long ago, and I plan to keep working at least part time for the foreseeable future. We have a great job/calling, we get tons of respect from society, and I get a lot of satisfaction out of being a doc. So I will keep working even though I already have the healthcare piece taken care of…)
I have stared retirement in the face several times and always pulled back. Never forget that all this money you are saving and investing for retirement will start paying lots of income as the amounts pile up. You do not need to be an income investor for this to happen. I think working provides socialization, structure along with the sense you are helping people. A little earned income is also nice.
I think this is an excellent discussion for all of the young FIRE aspirants. Work has benefits way beyond the income. I just turned 62 this summer and have had a 30+ year career in emergency medicine. I can easily afford to “hang it up” but continue to work for 2 main reasons: I enjoy working and the fear and uncertainty of future health care costs prior to Medicare age (65) if, like many people, you spent your career in the small business sector and your insurance is not covered by prior employment in the military, educational institution, or large company.
So for the younger crowd who aspires to FIRE, you’ll find that the benefit of of financial independence is not so much that you’re going to turn in your badge at age 50 and sail the world (although you could), but that it gives you the flexibility to work as much or as little as you choose. Working for fun and not money is a good place to be. I figure I have all these years of accumulated experience and if I can use it to help someone, what’s not to like? Working 7 shifts a month vs. the 16-17/month I cranked out for 30+ years is a great place to be.
– Dr. Scott
It is nice to read this refreshing post, as opposed to the multitudes of discussions about retiring early, escaping as soon as possible etc. Of course retiring at a time in life that makes sense professionally, financially and for whatever other reasons that make you happy, but I think it is sad that the pursuit of being done as soon as possible is so prevalent in a lot of these discussions. There is plenty of data out there to support the facts that a lot of us that retire too soon have more substance abuse issues, self worth issues as well as a good deal of depression and regret. I believe that two of the paths that we can take in our careers can be categorized thusly. We can chose to be in a sprint, hurrying through our careers as fast as possible to reach an end , or we can take a nice leisurely jog and enjoy whatever aspects in our professions that attracted us to them in the first place. And yes make a good income along the way. There is no doubt in my mind that working less hours and days, and longer in time period, is the best path.
This has morphed into another group of posts touting the benefits of working beyond your peak years and the potential losses of retiring “early”.
When I’m working, I sleep an average of 6.5-7 hours a night versus 8 hours on vacation. When I’m working, I spend about four hours a week exercising or reading. On vacation, I spend a couple of hours a day exercising or reading. When I’m working, I don’t cook as much. When I’m on vacation at our retirement cabin, I cook and grill a lot more.
I don’t need structure. I’ve got plenty to do. I don’t need prestige or status or respect. As I’ve said before, if you like your work as much as leisure, by all means, work until you drop. I prefer leisure. I’ve been working since I was 12.
There are types of medical work that I would prefer to the “15 minute me check madness while looking at the EMR more than the patient.” Once I’ve made enough to downsize to more fulfilling work (private pay only psychiatry with a focus on brain health and functional longevity) I might still work part time. Insurance won’t pay for this work, but they will pay me to prescribe a bunch of partially effective meds in 15-20” treadmill appointments…
I’d encourage you to draw a Venn diagram of your ideal life in one circle and your current life in the other. The more overlap you can get between them, the happier you are likely to be. Rather than be miserable for years and then graduate to a life of bliss, I’d encourage you to try to figure out ways to overlap the two.
This is a great post. It’s kind of a mark of shame nowadays, especially in the blogging world, to admit that you love working your W2 job and don’t pursue and passive income or rental property. But if you like what you do and have a good lifestyle doing it, I see no problem with focusing on your regular old day job.
I think this could be a great series of posts! I’ve been absorbing FIRE and other PF blogs for about a decade now, but the older I get (34) and the further I make it into my career – and the more family members and colleagues at traditional retirement age that I observe – the more I think that the idea of retiring extremely early is short-sighted at best. Many super savers FIRE about 10-15 years into their careers, where I am now. Frankly I could afford to pull the trigger by FIRE standards, but the idea of abandoning the career I spent 20 years preparing for and building makes less sense to me every day.
Most people FIRE or become able to afford to just as your income begins to accelerate, the hours required start to drop (for many, maybe not docs and attorneys), professional networks are established, and the work itself starts to get easier as you move into mastery. You may also have more flexibility and autonomy at as well as the ability to make some demands regarding work life balance. Not to mention you may be an expert enough to start helping shape your industry and actually improve your company versus just making an individual contribution. All these things can lead to fulfillment, satisfaction – oh, and piles of money.
Sure if you hate your job, FIRE sounds great. But if you’re going to build a whole second “side hustle” that takes 30+ hours a week anyway, consider putting that effort into building your career (or another career) instead. Join a board, go to networking events, build relationships with management, speak at industry events, work late, take on that project, etc. etc. My mom and dad (divorced) both retired early and are FI. She has a $6M net worth and now works 15 hours a week teaching math online for about $6k a year just to keep her brain sharp and have something to do. My dad has $4M and wants to get a job at Starbucks or Home Depot so he can chat with people all day. They’ve both been retired for years and are in their 60s. They are happy, but if they had stuck with their careers they might be even happier with their work options at this point.