|Bruno and Pablo were two ambitious cousins living in a small town. One day the mayor of that town came to them and said there was a water shortage and the main water tank of their town was empty. He asked them if they would fill buckets of water from the nearby river and empty them in the tank? For this work he would give them a certain amount of money per bucket.
It seemed to be a great opportunity and they agreed to do it. Next day both Bruno and Pablo took their buckets and went to the river, filled them with water and emptied them in the tank. They both did this for a few days and got paid. After a few days Pablo realized that this was a very tedious and time consuming process. So he started to think about a better way to do this activity, and came up with an idea to build a pipeline from the river to the tank. This pipeline would carry all the water instead of them, and they won’t have to make several trips to the river. Excited about the his new idea, Pablo went to Bruno and shared his idea to build a pipeline. He said by doing so, they won’t have to carry the water, instead the pipeline would. Bruno wasn’t too keen about this idea as it involved lot of time, resources and energy to build a pipeline. So he told Pablo that he was happy carrying his buckets and if Pablo wanted to build a pipeline, he could.
Pablo started building the pipeline and despite of criticism, ridicule and skepticism, he completed it. Once completed, the water slowly started to flow from the river to the water tank, and in no time Pablo became a free man. He didn’t have to put in the daily effort of filling buckets of water and emptying them in the water tank, to get paid. The water was flowing through the pipeline and he was getting paid, even when he was sleeping, sick, on a holiday, or partying with friends and family. While Bruno on the other hand would only get paid if and when he carried those buckets of water to the tank. If he took a day off, he wouldn’t get paid that day.
Looking to the success of the pipeline, Pablo decided to build several pipelines connecting the river to other nearby towns and villages, which made him wealthy, but at the same time took away jobs from many people like Bruno. 1
Hearing this story we think it’s so obvious to build a pipeline, but in reality 95% of us are bucket carriers like Bruno, and only 5% consciously work towards building their pipeline.
How do we build our pipeline?
I came across this 7R Theory of wealth creation. But for that we need to first know the difference between Active Income and Passive Income.
Active income is earned from either a job or profession which requires you to put in equal or more amount of work to get your wages, salary, fees. It isn’t a bad thing, and most of us have an active income source. But here if you don’t work, you don’t get paid. Nor can you pass it on to future generations. You stop working or die, the active income dies with you. Passive income, on the other hand is earned even if you don’t put in an equal amount of effort or time. It continues to flow even after you stop working or die. It could be passed on to your future generations.
The 7R Theory comprises of 7 different sources of income, spanning over different times. 2
Prior to the industrial revolution, there were only 2 major sources of income, Rate and Remuneration. Both were predominantly active sources of income.
|Rate is compensation people receive in exchange of goods. If you sold something, people paid you for that. Remuneration is compensation received in exchange of services and time. This would be wages, salary, fees. If you’re an employee you receive wages or salary, if you’re a doctor or attorney you receive fees from the people you see.
With advent of the industrial revolution, the effort and time people put in got transferred to machines. Replication became easy. Before the printing press, if people had to make multiple copies they had to manually write them. But with advent of the printing press and later photocopy machines, replication became easy, quick and economical. This was the first model of a pipeline.
In Present Times
As we moved from the industrial age to the digital age, and internet during present times, new sources of income got added to the mix. These require you to build a system, framework, pipeline and over time the flow of income comes to you with considerably less effort and time spent. This is the best way to create wealth and pass it on to future generations. First is Rent. If you buy a residential property or invest in a syndication to buy larger properties, and rent them out, you’re creating a pipeline for getting monthly passive income in the form of rent. Rental income comes in even when you’re sleeping, on vacation, or sick. Second is Royalty. Apps, games, technology, books, intellectual property fall in this category. You get paid royalty for use of what you’ve created. Next is Rights. This includes franchising, licensing, brand rights, software. McDonald’s gets paid each time you buy anything at their franchisee restaurant. If you download Office 365, Microsoft gets a monthly or annual licensing fee. Harry Potter merchandise is an example of brand rights. Last one is Returns. Any investment you make, whether it’s in real estate syndication, CDs, stocks, bonds, business, gold, art you get a return on your investment in the form of interest, dividends, value appreciation. Albert Einstein once said “compound interest is the 8th. wonder of the world”.
Creating a pipeline of multiple passive income sources, will not only create multi-generational wealth, but will also give you free time to do things, that matter to you the most.
|1 “The Parable of the Pipeline” – author Burke Hedges
2 “The 7R Theory of Creating Wealth” – author Dhaval Bathia