Last time I discussed my goal to be in a position to retire after a 20 year career. To reach my goal I need to accumulate a large amount of money. There are many ways to make money: jobs, savings accounts, stocks, mutual funds, real estate, start a business, receive an inheritance, etc. I find it useful to categorize the different ways that money is made as follows:
- Labor
- Capital
- Gifts & Inheritance
Each of us makes money from all three categories. For most people, the vast majority of their money comes from labor and a much smaller amount comes from the other two categories. Over the next couple days I’m going to discuss the pros and cons of each category. I will start with labor because it is the most familiar for most people. For now let me arrange the categories into a table with some defining characteristics:
|
Prerequisite |
How Much Control You Have |
How Much Effort It Takes |
Scalable |
Taxes |
|
| Labor | You need a skill that someone is willing to pay for. | You have total control over how much you work. | A lot. You need a job. | No | Taxed heavily. |
| Capital | You must have money or assets. | You have total control over how you invest your money. | Some. You need to learn how to invest. | Yes | Taxed less than labor. |
| Gift & Inheritance | Someone with money likes you. | Little or none. Either your parents are wealthy or they’re not. | None. Even Paris Hilton can do it. | Only if someone with money really really likes you. | Can be taxed heavily for high amounts (gift and estate tax). But no tax for low or moderate amounts. |
What is Labor
When I was 10 years old I did a paper route. I got paid six cents a paper. That’s labor. A few years later a math professor hired me as a math guinea pig. He wanted me to do all of the math problems in a textbook he was writing. That’s labor. Not to mention the most boring summer job ever.
These days I provide legal services. That’s labor. I help people invest their money. Also labor.
What’s Good with Labor
Most people earn most of their money from labor. Labor is the only way to make money when you start out in the world. There’s a low barrier to entry. Even if your only skill is digging holes in the ground, you can find someone willing to pay for it. As you develop skills your labor becomes more valuable. A doctor makes more than a ditch digger, for example.
How To Make More Money on Labor
You need a specialized skill. Some skills don’t require much education. Examples are entertainment (like sports and acting) or sales. If you think of others, put it in the comments. These days most specialized skills require some type of education (college, professional school, trade school, etc.).
Downsides of Labor
There are three big problems with labor. First, it takes a lot of time. A full time job takes anywhere from 40-80 hours/week. That’s 40-80 hours/week you can’t be with your family, read a book, write music, do what you want.
The second problem is labor is not scalable. You can’t make twice the money by working twice the hours, because you only have 24 hours in a day. The other way to make twice the money is develop a more valuable skill. I know people that work for a few years after they graduate, only to find they want to develop a more valuable skill. It requires time and money to develop a skill. Some go to night school while they keep their day job. That’s not an easy way to live. Others quit their job and go back to school full time. They forfeit their income for a few years, and even worse they eat into their savings to pay for school. Going back to school probably pays off in the end. But according to everyone I’ve ever talked to who’s done it, it’s tough to go back to school when you’re accustomed to having an income.
The third problem with labor is the way its taxed. The tax code is much harder on labor than capital or gifts. I will post separately on the taxation of labor vs. capital vs. gifts.
Great first post, Jefe. I’m looking forward to the future of your blog.