There are THREE different types of income. We need to understand the different types of income that are possible and then make specific and deliberate changes to what we are doing now.
Firstly, Linear Income
Here, you exchange your time for money. The more money you want to earn, the more time you need to give up. If you are employed, then you are earning linear income. As an employee, if you want to earn more, you have to work harder and sacrifice more time. So with linear income you can never have time and money since the more money you make, the less time you will have.
The problem is, there is a limit to how much you can earn based on time. If you were to stop or fall sick, your income also stops. This is a very fragile income source with little security. Unfortunately, this is where almost all of us are situated, particularly wage-earners.
The same concept applies for some businesses. For example, if you are in the business of selling water filter, then every water filter you sell will earn you an income. The more time you spend selling water filter the more money you make. This is an example of a linear income.
Secondly, Residual Income
Residual income is income you make from initial efforts. You put effort in an area and then you continue to reap an income thereafter for a certain time – which can even go on forever. Artists will continue to earn a royalty from future sales of their music albums or from people singing their songs; even if they can’t perform anymore. Another example would be royalties earned by writers every time you buy their books.
In business; picture this: you initially spend time to build up the relationship with your potential customer. Once the customer uses your products or services, he is happy and comes back for more. The second time round, you probably will not need to spend as much time servicing the customer in order to get the second order. If you have a quality consumable product, your customer will always come back for more. You work less but still earn an income. This is called Residual Income, or as some call it Recurring Income.
So back to the water filter example; imagine you have sold 10,000 water filter and your water filter has a consumable part that need to be changed periodically such as the filter itself. Then all you need to do is to sit in your office and wait for phone calls from your 10,000 customers wanting to change their water filters. The printer companies don’t make the bulk of their money selling you computer printer; they make more from selling you ink cartridges.
By having residual income, you are actually leveraging time. You spend less time and earn more money. The question then is how to find residual sources of income. When you are in business, as Paul Getty says, you must have unique highly consumable products. Why? Because these products will be able to give you residual income.
Thirdly, Multiplex Income
The most exciting source of income, the multiplex income, is perhaps the best way to leverage your time for creating wealth. Multiplex income is earned from the efforts of others.
You want to be able to earn $1 from 100 people rather than earn $100 from your own time. Now, why would anyone give you $1? So in the water filter example, if you have 100 people selling water filter for you and you earn a cut from every sale, then that would be multiplex income.