Income Investing

If you've never read the book, "The Richest Man in Babylon", you owe it to yourself to do so. I've bought and given away several copies of this book over the years. It was while reading that book that I first encountered the idea of generating income from capital as opposed to labor.

A little over two years ago the thought struck me that there are not really three economic classes in our country. There also aren't more than three as some would suggest by offering labels like upper-middle, lower-middle, etc. No, there are really only two classes in this country and the delineation is growing sharper with each passing fiscal quarter. What used to be a nation of some wealthy, many self-employed, and some laborers, has devolved into those that are paid money for their work and those that earn income from their invested capital.

Such distinctions may seem arbitrary at first but I submit that careful examination of the way these two classes are treated is proof enough of their existence. For example, the tax rate on money earned from work tops out at over 30%, while the tax rate on income earned from investments tops out at 15% for dividends and 20% for long-term capital gains. Money earned from a job is taxed before you can even buy your groceries. Money earned from investing is taxed only after all expenses on earning it have been paid. Could you work without paying for food? Is not your nourishment a cost of your labor? But, I digress.

If we continue to look we will find more indicators that the true class distinction is not between lawyers and doctors on the one hand and maids and waiters on the other, but on those that give their time and effort in return for pay and those that lend out their capital for income.

Now, this may all sound very obvious to you, but for a financially naive physics major like me it was quite the revelation. Post financial enlightenment I have endeavored to learn more about the workings of finance in the hopes of shifting my reliance on work to investing for income.

My first goal was to begin to save some capital to invest for income. I decided on a goal of 1% of annual income from investment as opposed to labor (so labor pay would only make up 99%). This goal seemed easily achievable. While it was achievable and simple in theory the practice required some pain. We all grow accustomed to certain creature comforts. Saving more money nearly always requires some sacrfices. So it was in our home.

Keep in mind I am not talking about retirement savings, 401(k)'s, IRA's, Thrift Plans, or any of the other tax preferred retirement vehicles. No, I am talking about saving money and trying to generate a real income from it with the eventual goal of parity with work-earned pay.

Imagine 20 years from now having twice your annual income with half of that money coming in every month whether you work or not!

"20 years? But I want that money now!"

Sorry, unless you were born lucky or can pick 6 random numbers in advance of their drawing by public officials, you are in the same boat as most of us and need to accumulate capital the old-fashioned way, saving it.

I am going to post Musings from time to time on this site, but periodically I will continue this theme of investing for income and the great class divide. All questions regarding saving, investing, etc. are welcome.

You can move your family from the stress of the labor class to the relative comfort of the investor class. It takes work, patience, and emotional fortitude, but it is the way to continue what your ancestors started when they came here to make a better life for themselves and their descendents.

Good luck and post a comment!

Joe