Salary vs. Total Income

The further I go down my debt free journey, the more I realize that it's more a mentality shift as opposed to a numbers game.  Don't get me wrong, at the end of the day, the numbers tell you whether or not you're succeeding in your goal towards financial freedom.  But "how" you get there is the hard part.  I've read through some of my previous posts and I've discovered that I have several themes.  I talk about: motivation, going against the grain, changing the way you think.  I haven't really discussed the specific actions associated with money.  In other words, I haven't talked about "how to make more money", "how to invest your money", "how to spend less money", etc...  And now I'm starting to realize why I haven't focused on those topics.  At least for me, my debt free journey was much less about the money tasks.  It had everything to do with getting my mind wrapped around the concept of being debt free and modifying my lifestyle to comply with the concept.


The concept of living off of your salary and not your total income is not new.  Some people reference it as "living below your means".  But the first thing I ask when I hear this is, "what comprises of your total income?". I've read many personal finance books/magazines/blogs and a recurring theme is the concept of passive income.  Passive income is basically extra money that you make which doesn't require too much of your time and effort to maintain.  Popular examples of this are: income from rental properties you own, income from side businesses, dividends and interest from investments, etc...  So, my very next question is, "how can you afford to obtain passive income?"  This is something I've struggled with for a very long time.  I'm sure you've heard the saying, "it take money to make money".  Well, to a certain extent, that's true.  So, I used to think that I would really start my road to financial freedom when I can start my passive income endeavors.  That used to be my focus.  I used to stay awake at night thinking of how I could get to the point when I could finally live below my means.  Because at the time, I was dead focused on figuring out how to get all this passive income so that I could start living freely off of my day job's salary.  If only I could get lucky and find an awesome rental property or if I could just launch one of my many money-making business ideas or hit the jackpot with a hot stock, than at that point I would really be on the right track towards debt/financial freedom.

But little did I know that I was sitting on the answer to living below my means the entire time.  You don't need to make more means to start living below them.  You don't need to own real estate or side businesses or a huge investment portfolio in order to gain passive income.  You just need to segregate your primary income into active and passive.  I give all the credit to my wife for this concept since she's the one who had the AHA moment around this.  We were doing our monthly budget awhile ago and we were both elated to see that we have come to the point where we have a substantial amount of money leftover after our budgeted monthly expenses.  This is huge for us since it wasn't that long ago when we had essentially nothing left at the end of the month (the classic living paycheck to paycheck scenario).  At that moment, she said we should classify the money we are using towards monthly expenses as our "salary" and the difference between that number and our overall take home pay as our "investment/business money".  It was such a little/subtle change in the way I thought of our income, but it makes the world of difference.  By living off of our "self-defined" salary, we have conditioned ourselves to target that salary for our lifestyle.  Also, we are able to obtain our "self-defined" passive income each month without having to put in the extra effort of starting up a new business or going into more debt to purchase an investment property.  It's basically a new definition of passive income: income that is obtained with absolutely no additional effort above and beyond your primary income.


To illustrate this concept with numbers, this is how I see it:

• If your total household income is $100,000/year and your self-defined salary is $75,000/year
• Then you automatically have $25,000/year in self-defined passive income

Once the concept makes sense, the more difficult part is executing it.  We are in the process of radiating the concept throughout our lives.  Using the above numbers, it means that we HAVE to live off of $75,000/year.  In other words, we need to train ourselves to think that that's all we have and we can't go over.  This pertains to all income levels...if you made $50,000 and you tried to convince yourself that you only made $40,000, it would be the same difficulty in terms of not wanting to tap into the extra $10,000 that you know in the back of your mind that you have.  But first thing's first, you need to define the salary that you will be living off of, then you need to start truly living off of that targeted salary.  I can do a whole other post on how to live off the targeted salary (and I probably will) but I wanted to first introduce the concept that has kept us on the right path during our debt free journey.