This comment came from a Breaking Free reader by the name of Caleb. I thought others might find it useful so I decided to highlight it here:

Brian,

I’ve noticed that wealth generation falls into one of two categories: Income and Growth.

Income puts food on the table today.

Growth builds over time until your net worth itself becomes income (by interest from investments).

Growth is almost always passive by nature. INCOME usually requires some kind of sweat equity, at least up front.

The two are often inverse compliments of each other. If you own a rental free and clear, you maximize INCOME (pure cashflow). If you fully leverage the equity of the property instead, you may end up with negative cashflow, but now you own more than 10 times as much real estate, all appreciating (GROWTH).

You cannot have growth without income first to pay the bills. So I am focusing my study and learning on INCOME-type methods.

I’ve noticed you’ve dipped into Real Estate, Blogging, Speaking, and other forms of INCOME methods. Could you please do a comparison of all the income methods you’ve explored, with a by-number breakdown of how profitable they have been? I suspect your Real Estate deals win hands down, but I’d happily be proven wrong…

I’m probably not alone in still exploring all the different INCOME options out there, without having yet settled on which one to devote my full time to learning.

Thanks for the great blog.

Hi Caleb, good points. You’re right there is often a trade off between income and growing net worth. I see this especially in real estate (where, as you pointed out, it’s referred to as equity vs. cash flow).

I try to mix both in my real estate deals. They all cash flow a little bit, while capturing some nice equity.

I can’t say for sure yet which method is best for passive income generation since I basically try a bunch of things and some work out better than others. Every business I start has varying degrees of success and every real estate deal gets different results.

But when I have a bit of capital, I invest in real estate. When I don’t have capital to play with I try other methods of generating passive income like starting web businesses or bloggin (which don’t require much capital).

That’s a big point actually. You don’t have to wait until you have large amount of capital or net worth to get passive income.

Blogging I see as passive income because although it takes “work” to write, it takes the same amount of work whether 100 people read it or 100,000 people read it. So there isn’t a direct correlation between time & income like a salary job. In a regular salary job, you’re unlikely to get a 1000% raise for doing the same amount of work, but it can happen in blogging just by your number of readers growing over time.

The other type of passive income businesses I like (which don’t take much capital) are web businesses like my tutoring site (www.universitytutor.com). It was started with very little capital ($100 and my own time) but provides passive income.

So to sum it up, I guess I think about it more in terms of 3 categories. (1) growth or net worth (2) passive income, and (3) regular income from a job.

Most people start at #3 and that is the lowest level. There is no doubt that the best source of regular income is a typical 9-to-5 job. It’s stable and far less risky than being an entrepreneur.

But while at that job you should try transitioning to passive income so you aren’t stuck there forever. If you have capital, invest in income generating assets like real estate. If you don’t, you can try building a passive income business which doesn’t require capital. Web businesses, blogs, review sites, etc. Reinvest what income you do have to keep the cycle going.

Eventually, you should reach a point where your job income has been replaced by your passive income and you will never have to work again (or more accurately, your REAL life’s work can begin because you won’t be working for money anymore). This is the definition of financial freedom.

Thanks for bringing up this great question! It helped clarify it in my own mind as well.
Brian Armstrong