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 don’t like my job but I like getting paid.
I find it strange on a site that is otherwise so directed to maximizing income and networth that so many people are planning to throw away a huge amount of income by retiring before they have to.
By conservative estimates I passed the “need” to work a while ago. But I plan to work until either my physical or mental ability or loss of demand for my services forces me to retire. Looking at older colleagues, I figure that will come in the early to mid 70’s. Too far off to make any definite plans, but I run scenarios for retirement at ages 70-75. Staying in the work force that long, if I can, makes a striking difference in lifetime financial situation.
If I retire now I will start spending down my principal. No realistic prospect of running out of money, but the idea of spending down is tough to accept. If I work till 75, under conservative assumptions about spending needs and investment returns, then I can be a net saver through retirement with my net worth peaking on day of death.
By delaying the time at which I start tapping retirement assets and by making total assets higher before I stop working, I can set it up to be a life long saver, which satisfies goals far more important to me than having no work to do.
Come 75, if my faculties hold out, I will keep working until they fail.
Ideally, I would drop dead in my office, and get paid for that last day of work.
But what is your goal? To leave a lot of money to heirs or and charities? To be the richest man in the graveyard? If your job isn’t perfect or gets worse than it is now can you not find an age before 70 when you are certain no matter your age at death that you will not get down to zero in wealth? That is my only requirement but in my 50s I’m still not confident enough to trust that I’ve really reached that amount of money
Nothing wrong with spending principle since we’re all mortal.
“can you not find an age before 70 when you are certain no matter your age at death that you will not get down to zero in wealth?”
CERTAIN is a pretty tough standard. Can I be CERTAIN we will not undergo an economic meltdown like Venezuela? Of course not. I consider it highly unlikely, but I would have considered the 70’s stagflation highly unlikely as well.
During the great recession I came across docs who had accumulated what they thought was plenty. Then their assets dropped during the recession. Older docs who have been out of the workforce for years do not do so well when looking for jobs….
If there were an economic collapse, who would be worse off? The 70 year old who retired at 50, found that their nest egg declined much faster than they expected and, having been out of the labor force for 20 years, realized they could not get a decent job, or any paying work at all? Or the person who kept working in a high paying job, accumulated a much larger nest egg, had not started drawing on it and was able to keep that job?
“To be the richest man in the graveyard?”
To have the largest net worth I can at death, but it is impossible that I will be the richest and don’t care whether there are people with more money than me.
My goals are not based on comparing myself to others, except that comparison to all others, not just those in one particular graveyard, is in part a way of saying “inflation adjusted real wealth.”
By the way, I plan to be cremated. It is cheaper than burial, at least where I live. Unless my family can find a medical school that will take my carcass for free.
As stated, my goal is to continue accumulating throughout my life. Given the volatility of investments, I cannot guarantee that net worth will be higher at the end of each year than the prior year. But my goal is to make that true as a long run average.
The long term consequences of abandoning earned income at 50 vs 75 are huge. Far too great for me to consider doing it.
Can I be one of your heirs?
Wouldn’t you rather in herit from Bezos than some poverty stricken doctor?
To be honest, I’m not sure I want/need either!
Great post! Over the last few years as I’ve gotten more into the financial blogsphere its easy to get “FIRE FOMO”. Reading all the WCI folks and other on the web who are traveling the world with young kids in their 40s can make you envious. I think this post shows that there’s more than one way to get to your goals. For some working is the way to go.
I do think there’s a trade off. I know some folks who moonlight every spare hour and hustle to afford an extravagant life that they don’t have time to enjoy.
My own approach to active income is to only take extra work that doesn’t take as much away from family time. For example covering calls in a small unit where it’s rare that I’ll have to go in but may have to deal with the inconvenience of a few phone calls.
The work/life balance looks different once your kids are out on their own.
No rushing home to see them before they go to bed, or to check in on teenagers whose lives are already, largely, independent.
No need to get home at any particular hour and nothing to do after dinner but work.
It was different when we had little ones in the house.
I think passive income gets excess attention for the same reason Roth IRA’s do. Psychologically, there is an excess attraction to “free” stuff. Passive income is “free” income: you don’t have to spend your time. Roth accounts are tax “free”: you don’t have to pay taxes when you withdraw the money. In both cases, you aren’t counting the up front cost you paid. Sometimes passive income and Roth accounts are worth it, but you have to run the numbers; sometimes you would be better off spending your time and/or money on the non-“free” option.