Basis points, 1099s, and balance sheets–Oh My! What language is this? Insurance agency owners need to speak a lot of languages, financ-ese is one of the toughest. It’s a language that has been misunderstood for decades. Your long term success rests on your ability to speak and understand the language as it was intended. Here is the proper take on some commonly misused phrases you’ll hear in this important, yet misunderstood, language.
1- Active Income or more commonly “Time is Money.”
Wrong Definition: Financial compensation paid for the amount of time spent working
Improper Use: I can’t discuss safety right now, I have to sell something. Time is money.
True Definition: A narrow minded phrase that gradually binds a person’s time.
Proper Use: When we believe time is money, we severely deflate the value of our own time.
I fell deeply into this Active Income trap. My accountant referred to our arrangement as a W-2 Wage Slave. Yikes! That stung!! We were a dual income household, both as W-2 employees. We were exchanging our time for money.
The more time we spent working, the more money we made. So we thought. Add taxes to this equation and the fallacy becomes very apparent. More wages meant a higher income tax bracket. So the more time we worked, the higher percentage goes to taxes, leaving less money per time spent. We were suffocating in our own success.
Read that one more time. Let it simmer in your mind for a moment, then ask yourself, Are you a wage slave?
Think about someone who makes good money. Unless they are a business owner, the more they earn, the higher their tax rates. If time is money, then more money requires more time, which means nights, weekends and holidays. They’re email account never sleeps. Worst of all, the money stops coming in when they stop working.
Most Insurance agents thought they were leaving the wage slavery world on the prospect of another kind of income earning opportunity.
2- Passive Income or more commonly “Making Money.”
Wrong Definition: Continuous compensation for prior work completed.
Improper Use: I’m still making money on the policies I wrote last year.
Right Definition: Money being earned regularly with little or no effort on the part of the person receiving it.
Proper Use: I’m building my agency to be a making money machine.
Let us dive into the nuances of true passive income. Passive income is an incredible thing. Work once, make money forever!!! What a great dream. Unfortunately, the so-called passive income stream for most agents requires way more “activity” then they signed up for. Marketing, quoting, sales, service, agency management systems, payroll, taxes, renewals, CE, compliance, billing, licensing, shall I keep going? Our passive income opportunity quickly becomes an active income trap. True passive income means regularly earning money with little to no effort on the part of the person receiving it. With that definition in mind, how does your agency stack up? If you truly want passive income, your goal should be to invest your resources to free up your time by building a machine that quite literally makes money. It creates value greater than the resources it takes to run it. The income from this investment is called a return. (That’s a bonus word for reading this far.)
You have many possible input resources available. Time, money, energy, effort, focus, relationships, insurance companies, etc are all valuable resources available to use. Time is the only one we can’t earn back, everything else is replaceable or renewable. The only way to true passive income is through investing all resources in an effort to free up time.
Right now, are you still trading time for money? Or are you MAKING MONEY through intelligent use of all of your resources? The nuanced differences will make all the difference.