Passive Income

Hello! David J here again bringing you more of the steps on my journey toward financial independence.

A fellow named Chris Wise recently sent out something about passive income, and it really got me thinking.

See, in his article, Chris Wise feels very strongly that devoting one's resources to the acquisition of passive income is more important than the elimination of debt. He claims that focusing on debt elimination distacts one from making more money.

Now, understand: I don't disgree with that. As Chris says, if we generate enough income - preferably passive income - the debt situation will take care of itself.

The challenge I have with that is this:

An adopted mentor of mine, Robert G. Allen, describes what he calls his "Bathtub Theory of Economics". His theory expresses wealth accumulation in terms of cash inflow versus cash outflow. He uses the paradigm of water flowing into a tub and drains allowing the water to escape from the tub. If the water is escaping faster than it flows in, you have two choices: open more faucets or plug up some drains.

Coming from the IT world, I've seen a lot of situations where corporate management was content to mask issues rather than expend the resources to resolve them. Chris's one-sided suggestion seems to me to reflect a similar paradigm: create a sufficiently massive passive income that the demands of debt service are over-whelmed. That way, massive cash flow not only serves to grow the business (instant gratification) but eliminates debts at a rate faster than if cash flow was only a bit more than the demands of debt service.

My personal belief is that the best way to build LASTING wealth, is to clear up unhealthy debt first. That is, plug some of the drains in your "money tub" so the cash which does flow in doesn't flow out so quickly.

I have the perfect example of this in my life right now. As I write this, I've been out of work for a year and a month. I've been living off of my life savings to keep my bills current and protect what's left of my credit score as long as I can. There's been no - or very little - cash flowing in, while the rate of outflow has remained steady, or actually increased somewhat as I've been buying study materials to increase my knowledge and build my business. I'm coming down to the last two months worth of my life savings. I've been job seeking while I've been building my business, but as yet I've not acquired any new income. So, the money I had, and the little I had coming in - unemployment compensation - have been overcome by the demands of my bills and debt service.

Had I been able to "plug some drains", my money would have lasted much longer. Now the divorce settlement was a serious drain on my resources - it cost me better than half of my life savings. Had that challenge not arisen, I could continue for at least another year on course toward building my business. As it is, I must now make some choices between new sources of income that are, perhaps, potentially a great boon to my plans yet may also present some challenging options from which to choose.

Here's a comparison that may help clear up my point for you:

Suppose you're in a boat on a lake. The boat springs a leak. You have a pump that can keep up with the water coming in as long as no new leaks open up. Now, you could stay out on the lake if no new leaks pop open or someone gave you more pumps, or you could get back to the dock and pull the boat out of the water to fix the leak. What would YOUR choice be?

So, my advice is yes, acquire passive income - as much passive income as you can.

However, when it comes to my cash situation, my preference would be to "plug some drains" in my money tub so the money I do get stays with me longer and allows cash in "the tub" to build up more quickly than if the outflow rate was still the same as it was before I acquired the new income.

We all have money mistakes we'd like to put right, things we could have done better that we'd like to fix. My preference is to "clean house" financially when the opportunity presents itself. With my financial house in order, my pursuits of income will utlimately be more productive, in my opinion.

We'll talk again soon!

Take care - be well!

Much Success!