Updated: October 13, 2020
I’m an advocate of creating multiple sources of income because I believe that it’s the key to achieving financial security.
In recent weeks, I’ve been planning to start a new personal project and it seems that my biggest hurdle is finding the time to doing it.
So, I took a look at how I’ve been using my working hours and realized that if I want to free up my schedule, then I’d need to spend less time on some work that I do.
However, I can’t just set aside those that take up the most time, especially if they generate good income. Thus, I have to qualify my work according to how efficient they are in creating cashflow for me.
During this whole process of analyzing the quality of earnings that each income source produces, I was able to come up with The Income Efficiency Plane, which I’m sharing with you today.
The Income Efficiency Plane
This plane is composed of two axes, which represent different types of income.
The vertical axis is the active-passive income line, while the horizontal axis is the linear-residual income line.
To simply define these terms:
- Active Income – you earn only if you work
- Passive Income – you earn even without working
- Linear Income – you earn only once
- Residual Income – you earn multiple times
The Income Efficiency Plane can be used to plot the common sources of income on an area that can then tell you how efficient it is at generating income with respect to your effort. To illustrate the plotted income sources above:
It’s an active and linear type of income. You’ll earn only if you put in the work. And you only get paid once for making that effort.
It’s an active but less linear type of income than a job salary. You’ll earn only if you put in the work. But your output can be leveraged to generate income several times or in different ways.
For example, a copywriter would usually write sales templates, which they’ll use in different projects. Some of them would even sell those templates.
It’s an active type of income that creates residual cashflow. An author would spend a lot of time writing a book. But once it’s published, he’ll continue to earn indefinitely for as long as people are buying his book.
And more so if a film producer suddenly wants to make a movie based on it. What I’m saying is that the income potential is almost limitless.
It’s passive income but you only earn once. An example would be purchasing a valuable piece of art. You don’t really have to work for it to generate income. You just have to wait until its value appreciates. However, you can only earn once it’s sold.
Rental Income and Business Profits
These two lie somewhere in the middle of the plane, but more towards residual than linear income.
There’s the effort needed to maintain a rental property and run a business. But there’s the option to hire someone to do most of the work for you and make it more passive than active.
Then, both can generate income multiple times and in different ways. But it’s not a limitless source because demand can decrease over time and affect your cashflow.
Earned Interest and Investment Dividends
Most people desire to have these because they require almost no effort to maintain and you can ideally earn limitless times from them.
The only downside I see here is that normally, they don’t generate as much cash flow compared to other sources of income.
What I Learned from Creating This
When I began plotting my sources of income on this plane, it was easier for me to see which ones are more efficient in generating cash flow for me.
Interestingly, when I took into consideration the amount of money I earn from them, I discovered that those within the greener area are the most desirable sources of income for me. Particularly, capital gains, rental income, business profits, and royalty payments.
Capital gains may be linear, but at least it’s purely passive. Royalty income may require effort, but it does create a lot of residual income. Meanwhile, the wealthiest people I’ve met are either into real estate rentals or running a successful business.
Interests and dividends, which are in the bluer area, might be more passive and have better residual cash flow. However, the actual amount of money you earn from them is much lower — less than 8% a year with my estimates. This pales in comparison to business profits, where I would normally get at least a 20% return on my capital within a year.
And of course, the yellow area of job salaries and freelance income can generate excellent cash flow for an individual, but the continuous effort required to earn is severely limited by one’s time, health, skills, and abilities.
I searched online if there have been similar graphs to what I did above, but didn’t find any. If you’ve encountered something like this before, then do tell me because I’m curious to explore this concept more.
In the meantime, I’ll just continue analyzing my own income sources using this graph, and use it to improve the efficiency of how I make money.
How about you? What do you think of The Income Efficiency Plane that I created?