The Truth About Why You're Not Building Wealth

A few years ago, I had the privilege of reconnecting with a colleague (I’ll call him Frank) over dinner. He and I used to spend a lot of time talking about how to build our wealth back in the day, so it was quite a nostalgic experience—revisiting our motivations, ideas, and early investments.

Frank has been married for decades now, and has a 20-something son (John) who’s learned a lot from his father about how, and why, to build wealth. I asked how John was doing.

“You know, he’s doing well,” Frank said, somewhat lamentably, “but he hangs out with people who just don’t get it.”

“What do you mean?” I asked.

“Well, John has a decent job at a tech company. He’s not really climbing the ladder, but he’s happy doing what he’s doing. And really, that’s fine because he’s been investing in properties all over town. He gets rents checks every month—and he’s not even 30. He get it. His friends, on the other hand—“

“Let me guess,” I interjected. “They’re busy spending money on toys and thing.”

My friend nodded. “They don’t get that in a few years, they’ll face a crisis—they’ll have a family and no retirement, no saving for their kids’ education. And they’ll have built a lifestyle around spending every penny of their paychecks as soon as it hits the bank.”

What we’ve learned about wealth is wrong

My friend is right—they don’t get it. But it’s not really their fault. You see, we’re taught from a very young age that money is a vertical game.

Here’s what I mean: Society teaches that everyone should go to school, acquire a skill, then apply for a job where they can use that skill. Each one of us gets paid for our work, and that becomes our vertical income stream.

As we increase our experience and knowledge, we also climb the ladder in our workspaces. That means more money—money that is proportionate to a certain level of responsibility and effort.

But do you know what also grows as we get older? Our lifestyle. It expands to include a spouse, children, and extended family. And to keep them safe and happy, we buy homes and cars and furniture and insurance and tuition—all of the things that make us content.

There’s a catch, though. While our lifestyle can continue to grow, there’s generally a limit to how much we can physically work to earn money. In other words, our limited vertical income makes an expanding lifestyle problematic.

That’s why my colleague was so distraught by John’s friends. It wasn’t because they weren’t grabbing at money. It was because they had no sense of the limitations they were facing. He wanted them to see that there is no limit to how rich a life you can live with those who matter to you.

His son, fortunately, understood that. He knew that a vertical income stream wasn’t the only way to build wealth.

The other way is horizontal income—often referred to as passive income.

John knows this income stream well, thanks to the lessons of his father. He saved a lot of money through his college years, and was able to make modest investments in real estate by the time he was working. Those investments are already bringing in money in the form of monthly rent checks.

Granted, this rent money is not really horizontal income—yet. At the moment, it’s paying off debt incurred when he purchased his properties. But in a relatively short amount of time, he will own those properties outright and will simply be collecting rent checks as income.

How to begin building a horizontal income stream

My friend—and his son—offer an instructional story on why both horizontal and vertical incomes are important. We need to remove the stale societal lessons of relying on paychecks, 401k investments, and social security to give us the life we want through retirement.

It’s time to get serious about horizontal income. To get you started, here are some basic guidelines to keep in mind as you begin building your passive income stream:

*   Make a fundamental mental shift: Think about building wealth, not just making money to pay the bills.

*   Create a vision for your future—what you want your lifestyle to be—so you know how much horizontal income is necessary to cover it.

*   Build your assets or portfolio slowly. This reduces risk and gives you the opportunity to pay off debts early so you’ll be collecting pure income in a short amount of time.

*   Don’t incur a lot of debt just to acquire asserts for horizontal income. If you can’t cover the expenses of owning and maintaining it with ease (mortgage, utilities, upkeep, etc.), then wait until you can with available cash.

*   Aim to have 100% of your expenses covered exclusively by horizontal income.

*   Don’t let the market take you down. Have enough equity in your properties and sufficient cash flow to cover all bills in a declining market.

*   Don’t match your spending with your income. Use the added income to pay off debts and secure a comfortable future.

*   Keep this in mind: $1 of horizontal (passive) income is equal to $10 of vertical (earned) income. Why? Because you don’t have to do anything to collect on passive income; vertical income requires valuable time and energy.

Unfortunately, many of us have to re-learn what we thought we knew about making money and building wealth—largely because of the norms society has taught us. And while education and hard work are incredible virtues that should never be discounted, they alone won’t give us what we need to secure a comfortable future.

Instead, follow the example of John—save wisely, invest early, and plan a future around both vertical and horizontal income.

Matt King