Multiple Sources of Income

When you are just getting started, you will rely primarily on savings to build your net worth. Your savings will get invested into financial assets. This will then start to generate new streams of income. Now your net worth is being driven by two sources: savings and income being generated by your investments.

Over time, as you continue to execute the program (save and invest) you will generate even more income streams. At the same time, your older income streams will grow in size. Soon the income being generated by your investments each year will be larger than your savings.

This is when the power of compounding really starts to kick in. Over time, the income streams become rivers. When this happens, your net worth begins to 'hockey stick' higher - and your financial plan reaches escape velocity.

Active vs Passive Income Sources

Active income sources: You do most of the work to generate these - you trade your time for money. An example of this is the income from your primary job. Perhaps you also have a side hustle.

Passive income sources: After doing the upfront work, the income from these streams is automatically generated - the income comes in even while you sleep. An example of this is investing in financial assets.

Passive streams are much better sources of income than active streams. When you are young you will need to leverage both sources to grow your net worth.

Taxes

There is another important reason why passive income sources are better than active income sources, and that is taxes. What you really care about is how much money you have after taxes are paid.

Active income sources tend to get taxed at your highest tax rate.

Passive income sources, like capital gains and dividends, tend to get very favourable tax treatment.