Happy Day to you. This is Ken Kaufman and I am thrilled you’re here for episode number four, maximize income and joy.
We are working our way through the impact your net worth model, using impact as an acronym with each letter identifying one of the six key principles for building net worth, and getting ahead financially.
As a reminder, here they are. The first is I for iterate mindset and process. I talked about this in the last episode. And in fact, I need to insert here really quickly. The conclusion to my story of receiving all this feedback from my professor on the business plans that I was writing and presenting, I forgot to bring that to closure by letting you know that we were able to go and compete in several regional and national business plan competitions, and in all but one of them we placed either first or second. And I attribute, without hesitation, to the feedback that my professor gave to me and my team’s ability to iterate toward that, implementing that feedback into our plans.
And not just from him. We ended up receiving feedback from dozens and dozens through the process. And all of it was so helpful. I only share that result to hopefully instill in your mind that iterating is a valid method for improving. And it worked there and it’s worked in many other places throughout my life.
The second letter is M for maximize income come and joy that’s what we’ll talk about today. P is for prioritize the waterfall. A align with partner and waterfall. C is for cultivating assets, and T is terminate debt. So today, this letter M maximize income and joy. I want to start with a quick story from my childhood.
I loved baseball, I preferred that over any other activity or any other thing I could spend time on. In fact, as a child, I was only allowed to watch a certain amount of TV every day or within a week’s timeframe. And I always used up all of my time to watch my favorite baseball team play. I traded baseball cards. I played baseball. The first thing I did as soon as I got home from school was play baseball until the sun came down or my mom said it was time to come in for the evening.
I again spent all this time and effort trading baseball cards with my friends. I had the starting lineup for my favorite team memorized. I also had memorized the starting lineup for all of the teams in their division that they played regularly. And I knew all of their statistics, number of home runs, batting averages, on base percentages, you name it, I was right in the details of all of it.
I figured when I turned 16 and was going to get my first job that it should be in baseball. And so what better way to earn a living and be around what I loved so much than to umpire little league games.
In this instance, I was an independent contractor. I had to buy my own equipment,even had to pay for some training. So I made that investment. And I started to umpire. I got paid a flat rate per game that I umpired. The games had time limits. So generally speaking, I knew about how much I was going to make per hour. If I was paid $20 a game and it was a two hour game, then I knew I’d be making about $10 an hour.
Then, as I started to do this, my mind started to open up to this concept of active income, where I was trading my time for money. And I was starting to be asked to travel up to 45 minutes to umpire game, but I got paid the same amount, yet I was spending an hour and a half both directions without getting any compensation for which was lowering my effective hourly rate.
At first I was just happy to take whatever job, but then these thoughts starting to come in. And I started to understand that the amount per hour that I was earning would go down as I had to travel. And I also started to realize that if I could umpire two or three games back-to-back at the exact same field, that was the most efficient and effective way to maximize my hourly rate. Because I wasn’t traveling and having to pay for extra gas to go back and forth from one place to the other.
Now, as I went through this process, I realized that the amount that I made per hour was critical. I also realized the other constraint to my active income was the number of hours that I had to offer or the number of hours that were even available for me to sign up and umpire for. And I realized that there’s these two constraints to maximizing active income, how much can I make make per hour or per day and how many hours do I have and are available to exchange for those.
So there’s two types of income that I’m talking about trying to maximize. The first is this active income concept, where we have a job, we have employment, or we have a place where we’re trading our time for compensation at some level. And the active income concept has these constraints – you can only make so much money with the amount of time you have and with what your time is worth, which may include your education, creativity, innovation, and overall contributions to an organization, whatever they value you at. Now that doesn’t value who you are, or who any of us are in terms of who we are as a person and what our potential in the world is. But this is just a real life reality. Active income is dependent on this: how much can I make per hour, and how how many hours are available for me to work.
There’s one other type of income. And this is what we call passive income. And this is where you don’t actually have to show up or trade time for earning some type of wage.
This can be if you own a rental home that you put on Airbnb, or were renting out directly in some way, and you have that income coming in. It could also be if you have investments where you have dividends or interest that you’re earning, or even if you sell assets and earn capital gains. This is a passive income where you’re using these assets, and we have a later part of the impact your net worth model, it’s letter C for cultivate assets where we’re going to get into this. But you have these assets that are enabling you to earn a passive income. You could also consider, if you are of age, Social Security or a pension from a retirement plan as a form of passive income, because you’re not having to show up and and put time in. But you could argue that you had to put the time in earlier in your career to then earn it. But in that given week, or that given month when you’re receiving those payments, it didn’t require any of your time. So these are some examples of passive income.
When it comes to maximizing active income and passive income, they both have their constraints. To maximize your active income, you have time and you have how much you can make as you exchange that time for earnings.
You also have this passive income, but you can’t just raise your hand and say you want passive income. It usually takes some type of an investment, or having some type of an asset that allows you to earn that income from it.
So when we talk about maximizing income, The ideal is to eventually be at a place where your income coming in is all from passive sources. And this is the concept of financial independence, which depends on how big you need to grow my net worth so that you can live off of that net worth for the rest of your life, providing you the income that you need.
Now, I want to get into one other piece of this. When I created this impact model, and I created this maximize your income principle, the last thing that I wanted to do is to encourage anyone to trade their time to take their time and find the highest pain return for that time, and have it be something that made them miserable in their life.
You also want to maximize joy.
If you’re trading your time right now in your active income pursuits for something that makes you miserable, or that grinds you down and wears you down so that you can’t be present and enjoy the rest of the areas of your life, then it just does not make sense for you to continue down that path.
And I want to be super clear: money is it means to an end, it is there for us to then take and use in some other way.
Hopefully you can maximize your income in a profession or field where you can receive fulfillment and happiness and joy. And hopefully that’s true. But then with the money you receive, you have the ability to then use it in pursuits that are fulfilling, that you’re excited about and that will help you make the contribution to the world that you want to make. So there’s a balance here, you cannot just kill yourself and work 20 hour days. Just because you think you have to maximize you income, you also have to maximize your enjoyment, or fulfillment in life or happiness.
And whether the most important thing in your life is your family, or you’ve got important hobbies that aren’t necessarily income generating. You want to be able to use as much of your money as you can to help you to pursue the things that bring you happiness and joy.
Well, there it is: maximize income and joy. Our next episode is going to get into the third letter in the impact acronym, which is P for prioritize the waterfall. Now I realize this doesn’t make sense to you. I encourage you to listen to the next episode. This concept of the waterfall is something that I think you’re going to get a lot of value from everyone I’ve ever shared it with has said wow, that makes so much sense. It’s so simple, and that it’s a game changer for how I’m going to think about what I do with my income for the whole rest of my life.
So make sure to subscribe to the podcast so you don’t miss it as well as all the following episodes on this impact your network model. Many many thanks to you for joining today. This is a wrap for episode four. Happy day.