There is an important risk that only few talk about and 90% do not assess even if they often think about it, income risk. In this three episodes series I would like to raise awareness and provide readers with strategies to mitigate these risks by increasing income and creating additional income streams. In the same context, I will try to explain why investing is important and a real cure to this problem and what investing actually means.
Let me first clarify what money is, even if this may be a repetition of your knowledge. Money can be seen as the most liquid and most international asset that mankind has ever invented yet it has no intrinsic value, money only has a virtual value which in fact is the case for most assets. It was initially invented to serve the military for easily purchasing weapons and soldiers ́ services. Before the invention of money, services and goods were simply exchanged by traders who kept book of their transactions. Money is both, a measurement tool that allows us to put a value i.e.: price onto products and services. However unlike the metric system, the frame of reference of money in not static but dynamic. The distance that one meter describes is always the same, no matter where or when you measure it. But the buying power of a certain amount of money changes with time and location. The same product can be purchased for less in an online store than in a physical supermarket.
On the other hand money is a quantifiable points system used by the waste majority of civilizations allowing us to accumulate points and to exchange these points into almost anything.
When I talk about buying power I mean the value of money. We already learned that this value changes with location and time. Let ́s look at an example:
100 USD were worth 2.000 cans of coca cola in the 1950 ́s vs approximately 120 cans today. That ́s a 1500% increase in less than 70 years or in other words a 20% increase p.a. on average. No wonder Warren Buffet is one of the major stockholders right?
This tells me to be concerned about the buying power of money than only focusing on the actual number of currency on any account.
The coke example shows that your buying power actually decreases in time and this changes becomes substantial. Your money experiences a reduction of buying power year after year at more or less the rate of inflation. It ́s not exactly exactly inflation, since inflation only measures a basket of goods but not all. In fact, most people experience this depreciation the way that everything becomes more and more expensive because the price of food, housing, services, gas, etc continuously goes up. But in reality, the value of your money decreases, which eventually results in a loss of buying power and while this may sound like the same thing, there is a slight difference to it. It ́s not the value of products or services that is increasing, in fact most products and services actually decrease in value due to automation and outsourcing but still the life becomes more expensive because inflation reduces the value of your money. Eventually, the result is the same but the reasoning is different. Increasing pricing is not the source of inflation its only a symptom that Central Banks are trying to curb because the real source is a desired feature of money, i.e.: interests in general.
Interests are the real money printers! When a central bank lends 1 billion to a bank and asks for 1% interest return it has just created an extra 10 million of money overnight. And we all know what typically happens to the value of the one if you create more of something? That value goes down, which in the first place leads to this vicious circle of inflation.
Simple math, if your money experiences 2% depreciation p.a., desired inflation rate that Central Banks consider as „healthy“ and hence try to maintain, than you need to increase your income by 2% p.a. in order to cancel the effects. Sounds simple but of course its far form easy.
Before we will look at strategies that you can use in order to increase your income lets quickly clarify another aspect of income risk. Think about income and expenses by visualizing a sieve with little wholes different in size. The holes are your expenses, the cost of your lifestyle. The open water tap is your income. Water runs out as fast as it runs and that ́s the income situation for 90% of us throughout our whole lives. If your income stream drys out which happens a lot, you have the stress to find a new water tap before all of the water went through the tiny holes.
Now imagine that you open a second, 3rd and fourth water tap. All of a sudden more water flows in than out so you can have some extra holes for yourself, build a reserve, give away some water and the best of all; if one stream is cut you have a lot more time to look for replacement if required. With every additional income stream you mitigate your income risk.
In the next episodes of this 3 series article we will look at a verity precise strategies that everyone can use in order to increase income and create additional income. I hope this article added any value to your life by entertaining, raising awareness on income risk or best case give you a nice „aha-moment“. If so, please share it with others and leave your feedback. Any comments or feedback are welcome to open interesting discussions as there are usually more than one right or wrong way to look things and all opinions must be welcomed in order to fully comprehend a subject.