Yesterday I provided an overview of the three ways to make money: labor, capital and gift. I discussed the first way, labor. Today I will discuss the remaining two ways: capital, and gifts.
What is Capital
Once you’ve made some money from your labor, you can invest and make money from capital. The most common way is opening a savings account at a bank. Other ways: invest in stocks or funds, real estate, collectibles (art, stamps, baseball cards), or start a business. Starting a business requires a combination of labor and capital. Some businesses require high amounts of both, while other businesses may require more labor and less capital.
What’s Good with Capital
Generally, making money from capital requires less effort than labor. It usually takes less time to manage your capital. Your capital works even while you’re not. For example, I own stocks of Japanese companies. It’s nice to think they’re on the other side of the world making money for me while I’m asleep at night.
Capital is taxed less than labor. Not only is the tax rate lower, but there are also more tax planning opportunities to reduce your tax bill. As mentioned above, I’ll post soon on the taxation of labor vs. capital.
How To Make More Money on Capital
Capital is scalable. If you want twice the return, you can invest twice as much capital. Or you can find ways to invest your money at a higher return.
Downsides of Capital
With all the advantages of capital, what downside could there be? Just one. It takes a lot of capital to make significant amounts of money. Let’s take the stock market as an example. Even if you find ways to achieve an average annual after-tax return of 15% per year in the stock market (not an easy feat), you need to invest about $600,000 bucks to generate enough return to live a middle class life in Silicon Valley! (based on 2006 median income of $85,446)