In my last post on cashflow, I highlighted a collection of financial terms. Today I want to talk a bit more about three: cashflow, earned income and passive income.
I’m using the term cashflow in these posts for a specific reason: the fact that cashflow is different than, and often unrelated to, earning money. Think of cashflow as when the money you earn actually enters your life. Here’s an example: My son just started his first job at a local Blue Coast Burrito this past Monday and he’ll work three weeks until he sees his first paycheck. Even though he’s earning money now, he won’t have cashflow until later. This would be a dire situation if he were paying rent or buying his own food.
When I worked as a musician, I made very good money, but we often struggled to pay the bills. The reason? Cashflow. I worked for individuals and companies with various payment schedules and spent many a day hoping the mailman would diliver a desperately needed check for work performed weeks or months prior. This is, of course, why I’m advocating non-music cashflow. Even a small amount of regularly delivered cashflow can make a huge difference in living your life.
With that as a backdrop, I also want to make sure you understand the significant differences between earned and passive income and why they matter.
- Earned income – money that you earn in a one-to-one exchange for
work. “I’ll pay you $100.00 to play drums for a wedding this Saturday
night.” - Passive income – money you earn beyond a one-to-one exchange. “I
won’t pay you to record the song, but you’ll get 10 cents for every
copy that’s sold online.”
Most people consider earned income to be the best way to earn income. Why? The immediacy of the exchange and a perceived sense of security. Even in the case of my son’s new job, three weeks is not that long to wait. He’ll see the return on his time investment very soon and that is motivation to work in the mean time. He’s also secure in the fact that there are plenty of income generating jobs in this world. As long as he can work, he can make money.
Conversely, passive income frightens or confuses most people because it delays gratification and usually involves risk. In the case of earning 10 cents for the sale of every copy sold online, there is the possibility that it won’t sell at all. What then? But what if it sells 10 million times? What then? Could you use a million dollars over the next two to three years?
Which brings us right back to non-music cashflow. The primary reason to explore non-music cashflow is choice.
There are great and terrible earned income gigs. And there are risky and certain passive income opportunitites. But if you are constantly struggling to eat and pay your bills, you will ALWAYS seek earned income whether great or not. A major reason for the mediocre career I had is that I often took mediocre work. The fact that I HAD to take the work didn’t matter, I was the one playing the gig and therefore associated with mediocrity. Is it any wonder that I got only occasional calls for great work?
Non-music cashflow (read: a regular job that pays regularly) gives you options. When you don’t NEED the money everytime the phone rings, you can stay true to your visions and goals . You can actually build a career peice by carefully chosen peice.
