21st-century technology offers near-infinite financial possibilities. With a single tap on a smartphone or a click on a computer, you can buy shares on a foreign exchange, get competitive quotes for insurance, analyze years of financial data, receive up-to-the-minute reports, or on-the-spot prices of precious metals, and execute hundreds of other financial transactions. For those with an Internet connection, there are no restricted areas, no products you can’t purchase, and no places you cannot reach. It has never been easier to generate income. These ever-expanding choices beg the question: what is the best money method you can employ?
Expanding choices necessitate better decision-making. With so many financial products and strategies available, how do you determine which ones fit your objectives and circumstances? In this open-access environment for financial products, institutions recognize they must differentiate themselves from their competitors. Companies can’t simply present and explain their products and services, they must market them. Thus, unlimited choices are accompanied by increasingly “out-there” advertising.
While this type of advertising may help consumers remember the name of the company or its products, it doesn’t really provide any clarity regarding your financial decisions. Instead, you are simply inundated with emotional images and conflicting financial perspectives, which offer little guidance or education. In the end, most mainstream financial “information” delivered by mass-media outlets does little more than add new voices to the cacophony of opinion and hype. Infinite choices and multiple messages equal consumer confusion.
A Money Method That Always Makes Sense
Making sense of the multitude of messages and an endless array of financial products requires a unifying financial aim. This objective should provide context for evaluating all the possibilities available. To that end, the best money method is arguably to generate income. Creating an income strategy is far superior to measuring total return, net worth, risk tolerance, or even financial ratios. Instead, prioritizing your income (your financial life-blood, if you will), is going to have a far more significant impact on your personal economy. And this one question will help you make more prudent financial decisions:
“How will this decision affect my income?”
Perhaps this sounds too simplistic. Yet, we encourage you to try it.
How will buying a new car affect your income? (If the monthly payment is higher, your cash flow decreases. Is it worth it, or would you be better off finding reliable transportation for a lower price?)
How will investing in a qualified plan affect your income? Long-term the hope is your investment will compound to increase future income. Yet, money set aside in an account meant to remain untouched until age 59½ reduces your current income. Considering your personal circumstances, which is more important: income now or income later?
If you make good decisions based on increasing your income benefits, your financial life will make steady progress.
The Compelling Case for an Income Strategy
Most Americans do not function in a closed, self-sufficient economic system where we meet our material needs and desires by growing our own food, making our own clothes, generating our own electricity, etc. In order to acquire both the necessities and luxuries of life, we use money. Since maintaining our material world is a daily, weekly, monthly, and never-ending task, the need for spendable money (i.e., income) is daily, weekly, monthly, and never-ending. Generating income is the essential and foremost financial priority in everyone’s life.
We cannot overstate the financial priority of income. A major portion of the US tax structure centers on income. With every election cycle, politicians of every stripe inevitably tout “jobs creation” as one of their legislative priorities. (Is this because more people want to work? No, it is because people want—and need—the income that comes from having a job.) Similarly, the debates about Social Security, Medicare, and health insurance are ultimately concerned about providing and preserving income, and the costs of doing so. As a nation, we are obsessed with income.
What Does it Mean to Generate Income?
For our discussion, income is any financial gain that puts spendable dollars in your hand. A paycheck is income, as are payments received from loans and rental agreements. Interest and dividends are also income. A stock that grows in value to $10/share from $5 has experienced appreciation, but there is no income until you have sold the stock at a profit. Similarly, homes and other real assets are not income until you have converted their value to spendable dollars.
Generate Income: The 4 Facets of an Income Strategy
As the number one financial priority in everyone’s life, we can categorize income activities into four distinct actions.
1. Generating Income
The foundation of every good financial program is the ability to generate income. If you are employed, your ability to work is the asset you manage. Interest from a savings account, certificate of deposit, or other financial instrument is income. You can consider the profits from a rental property income. (In contrast, a personal residence, while a financial asset, is not usually a source of income; the house may appreciate in value, but that appreciation doesn’t deliver spendable dollars.)
For most, the default option for income generation is a job, i.e., getting paid for services rendered. While this is undoubtedly the predominant form of income generation, it is not the only method. A narrow focus on employment for income generation is a shortcoming of many financial strategies. Many people could benefit from using financial assets under their control to generate income now, instead of focusing only on accumulating for retirement.
2. Accumulating Future Income
In the simplest sense, “accumulating future income” is simply saving today to provide income in the future. Yet just as income generation may mistakenly overemphasize just getting a good job, saving can also be over-simplified to amassing the largest possible number on a balance sheet. As Barry J. Dyke puts it, “a major problem in financial planning today is that 401(k) and mutual fund marketers have successfully blurred the difference between ‘saving’ and ‘investing.’ When one saves, money is safe and liquid. When one invests, 100 percent of your money is at risk 100 percent of the time.”
Some assets, while highly valued, are not always ideal sources of income. For example, you may appraise a rare collectible at $1 million, yet this asset only becomes income when it is sold, which requires finding a buyer and relinquishing the asset. Instead, focusing on genuine, certain savings can help you now and later.
3. Protecting Income
Since most income generation comes through work and employment, it makes sense to protect both the generating asset (i.e., the individual) and its income potential. One reason health insurance is such a prominent political issue is that almost everyone’s income is affected by their health and the cost of maintaining it. The same rationale extends to getting both disability insurance and life insurance: when individuals stop generating income, everything else usually grinds to a halt.
Income protection is more than protecting your ability to earn income. As recent history shows, sudden changes in markets can turn profitable investments into sizable losses. Given this volatility, individuals may consider it prudent to “move” accumulated future income (savings) to various insured accounts to “lock-in” their income-producing potential.
4. Distributing Income
In industrialized Western economies of the late 20th century, the template for income success was long-term employment during one’s working years, followed by pension incomes (from government and private plans), supplemented by personal accumulation.
In this model, personal accumulation was about maximization because they assumed all assets to be easily convertible to income at a later date. If you owned a home, you assumed it you could sell it for a profit. If you held stocks, you anticipated future share prices to be higher and dividends consistent.
However, recent experience suggests the 20th-century model for income is outdated. In the Information Age, lifetime employment is less likely, private pensions are disappearing and government programs appear statistically unsustainable in their current formats. This puts a greater income burden on personal accumulation. Since many of the guaranteed income sources of previous generations are disappearing or diminishing, individuals must place a greater emphasis on income generation from their personal savings.
Life Insurance: A Certain Vehicle for Income Strategy
While many assets can do one or two things well, whole life insurance is in a unique position. The cash value component acts as a savings vehicle first, since premiums have a direct correlation to your cash value growth. This savings is steady and certain and is not at risk in the stock market. In other words, you cannot lose it. This makes it ideal for both the income accumulation and income protection phases. Furthermore, whole life insurance is liquid over your whole lifetime, making it a good asset for investing in cash-flowing assets and aiding in future income. Therefore, it also aids you as you try to generate income or distribute income.
If we can assist you in your income strategy, or help you refine your money methods, we’d be happy to help you. We invite you to connect with us, or email firstname.lastname@example.org. For more resources on income strategies and wealth building, sign up for our Prosperity Action Pack. You’ll receive exclusive content, including our ebook, “Your Guide to Activating Prosperity.”