A Fixed Income Is a Sucker Bet

September 10th, 2009 by Steve Pavlina

Do you live on a fixed income, earning the same amount of money paycheck after paycheck? Maybe you pick up a cost of living adjustment or a raise now and then (or suffer a pay cut or reduction in hours), but barring any major changes like getting promoted, fired, or laid off, is your income fairly stable and predictable? Do you have a good sense of what you’re going to earn during the next 3 months? Would it be exceedingly unlikely for you to earn double or triple – or half – of that anticipated amount?

If this describes you, then who decided to fixify your income? Who made that decision?

You made that decision, didn’t you? You decided to earn a fixed amount of money per month. You can trace your decisions back to some moment where you said yes to a fixed income.

Are you aware that saying yes was entirely optional? In fact, if you give it some thought (which I’ll encourage you to do in this article), you should be able to see that accepting a fixed income is a rather stupid choice, all things considered. A fixed income is a sucker bet.

How is that choice working out for you so far? Are you blissfully delighted with it? Do you like knowing that you’ll earn the same amount of money month after month? Does it feel comforting to know how much you’re going to make? Or is there some part of you that’s bored and frustrated beyond recognition?

Do you like the stability of it? Is it truly stable, or is your feeling of security rooted in a hopeful illusion? If some individual can decide to turn off your income with the words “You’re fired,” it’s hardly stable. If that’s your situation, it’s safe to say your income is unstable and conditional rather than stable and secure. We can say that all income is conditional, but how stable are those conditions? Does someone else wield the power to turn off your income?

For the sake of argument, let’s assume that your income seems reasonably stable, secure, and predictable. Perhaps you work in a high-demand field, and you’re really good at what you do, so even if you lost your current job, you could quickly find a new one doing similar work for similar pay. That may be a stretch for some, but for the sake of this article, we don’t even need to pluck that low-hanging fruit. There are plenty of other cuts awaiting a splash of lemon juice.

Downsides of a Fixed Income

Aside from its predictability and possible stability, virtually everything else about a fixed income is negative.

First off, a fixed income lacks flexibility. It cannot adapt well to changing circumstances. This means that fixed incomes can get pummeled in a variety of ways.

If expenses rise unexpectedly and surpass your monthly income, then you have no choice but to draw money from cash reserves or investments or go into debt. If your expenses later return to normal, this debt may be temporary, but you’ll still end up paying extra interest or losing interest on your depleted savings/investments, which takes money out of your pocket.

If you spend more, you can’t simply earn more to compensate. This turns unexpected expenses into threats. They become something you relate to with fear or worry about. What if the car breaks down? What if someone gets sick? What if prices go up? Such events are just part of life. It makes no sense to fear the inevitable. Stuff is going to break, including expensive stuff that costs a lot to repair or replace. If getting an unexpected bill stresses you out, your mindset is a mismatch for reality.

If expenses rise above net income for too long, you can sink into debt for a long time and waste a great deal of money paying interest to someone else. Many people remain stuck there till they die. If their fixed incomes are too close to their expenses, taxes, and debt payments, then getting out of debt becomes hopeless. Hope can only be restored by focusing on the income side.

For this reason, people on fixed incomes often spend an inordinate amount of time fussing over their expenses. Otherwise they may risk depleting their savings or going into debt. They want to fulfill their desires, but their income limits their ability to do that.

“I can’t afford it” is practically a mantra for fixed income people. They sacrifice their true desires in order to stick to their budgets, totally oblivious to the fact that no one is forcing them to waste their lives on expense-tracking tedium. If they desire something with a price tag, but they can’t afford it, they rule it out as impossible for them – as if their fixed income is the final arbiter of their desires. Eventually resentment builds. They start resenting the unfairness of the economy, of people who set the prices, of business in general, of money, and so on. The bad guy is somewhere out there. Nope… the bad guy is the stupid choice you made to fixify your income. Wise up and stop doing that to yourself.

People look really pathetic when they act financially helpless. This isn’t how human beings should relate to themselves.

“Hi, there’s something I really want. Actually, it feels like the perfect match for me, but I just can’t afford it because I’m on a fixed income. Help me! Can you give me a price break or something? I really, really want it!”

“How about if you give me a break and stop pretending to be helpless?”

“No, you don’t understand. I’m on a tight budget. I really can’t afford to pay full price.”

“Now you’re just making yourself look foolish. Who fixified your income in the first place? You did! Why are you putting the onus on me to work within the limits you created for yourself? You’re asking me to fit an elephant inside a breadbox. Why don’t you raise your limits? Raise them high enough to be well beyond your desires, so you can easily afford whatever you want.”

“I can do that?”

“Yes, you’ve always been free to do that.”

“Well, I dunno about that. I don’t think my boss will give me more money.”

“Screw your boss then. Why do you want a boss anyway?”

“But that would mean making major changes in my life.”

“Yes, it would.”

“I don’t think I’m ready for that. It’s too risky.”

“There’s no additional risk because you’ve already lost the connection to your desires. You’re already stuck in a situation where you aren’t experiencing what you truly want. Life doesn’t get any worse than that. To do nothing ensures a continuation of the worst possible outcome – being perpetually unfulfilled.”

“But it could get worse. I could be even more unhappy.”

“If you do nothing, it will indeed get worse. That’s a given. Your desires will slip further and further away as you disconnect from your heart even more. Life doesn’t get any worse than that. The only hope lies on the path of change.”

“So it’s to be torture then?”

“Yes, until it kills you.”

“I can cope with torture.”

“Suit yourself.”

“So how about that price break?”

“Fezzik, tear his arms off.”

Foolishly Guarding Fool’s Gold

It’s funny how people strive to protect that which is worthless. The state of being unhappy and unfulfilled is worth absolutely nothing. If that’s where you find yourself, you’re already at rock bottom.

You may think that you’ll have to risk some of your stuff (possessions, money, etc) to make big changes in your life. That may be true, but if you aren’t happy right now, then all of that stuff is of zero value to you anyway. If you try to maintain your stuff at the expense of your happiness and fulfillment, then you are indeed a complete idiot. You’re trying to sell your very soul, aren’t you? You’re entering into an agreement that says, “I agree to be perpetually unhappy and unfulfilled in exchange for cash and goods worth $X.” Add up the value of all the stuff you believe you’d have to risk to make big changes. Does that value of X make this agreement a wise choice?

Risk the stuff. It’s worthless anyway. But don’t make the insane choice of sacrificing your happiness for stuff.

Switching to a Variable Income

Earning a variable income, where you have the flexibility to earn a different sum of money each month, has a lot more to do with mindset than anything else. It doesn’t matter if you have a job, run your own business, or enjoy multiple streams of income. Those are just different vehicles.

The key is to recognize who determines your income. You do. You may have financial and economic realities to deal with, but ultimately you set the prices for what your time and efforts are worth financially, you decide what skills to develop and what kind of training to undertake, and you determine what kind of value to create and deliver to people. The most powerful choices are under your control.

If you deliver pizza for a living, you can expect to be paid for that particular skill based on its market value. Pizza delivery guys are easily trained and replaced, so you can expect to earn very little from such a job. Don’t blame the job for what it pays. No one is forcing you to choose a low-paying, unskilled job. If you try to squeeze more money from a job than the job is worth in the larger marketplace, eventually your boss or customers will figure out that you’re being overpaid, and you’ll be replaced by someone cheaper.

On the other hand, maybe you want to inspire and motivate people for a living. This takes a lot more skill than delivering pizzas, but it’s in much higher demand relative to the supply. In general, people are willing to pay a lot more to be inspired and motivated than they’re willing to pay for a hot pizza (unless you live in Naples). If you develop a high ability to inspire and motivate people, and you build the means to deliver your value to a sizeable number of people, you can eventually earn more in an hour than the pizza guy earns in month.

You not only have the ability to develop your skills within a particular field, but you can also switch fields repeatedly. If you want to earn more, then keep building skills and changing up how you combine and express those skills to maximize the value you’re able to create and deliver, thereby maximizing the income you’re able to generate. The opportunities to do this are endless as long as you remain flexible and alert.

Your income is not fixed unless you decide to fixify it. It doesn’t matter if you’re getting checks from the government as your only income source. Those checks may not increase in size, but they aren’t the only checks you’re capable of earning. If you don’t like the size of those checks, go out and earn different checks.

A Fixed Income Is a Sucker Bet

Take note that while you’re receiving a fixed income, someone higher up the chain of command is enjoying a variable income at your expense. When you receive a fixed income, you’re actually creating a variable amount of value, but the income generated by your excess value is being siphoned off to line someone else’s pockets. They’re profiting from your ignorance. How generous of you! It may seem like they’re taking on more risk, but keep in mind that if they go down, you go down too. You share in the risk, but you don’t share in the upside. You do realize you’re giving away the farm here, don’t you?

If you’re going to work, then why not receive and enjoy the fruits of your labor instead of giving most of your earnings away before you even see them? You’re already creating value, aren’t you? If you want to be generous, consider giving some of your excess value away to charity. I donate some money each month because it feels good to do so. But I donate to non-profits and charities that spend their money on things I want to support, not to stock-holding officers or investors who are already making millions a year.

Stop pretending to be helpless when it comes to how much money you make. Your paycheck has no power over you – except to the degree you give your power away. You may be working in a system where the higher ups have every financial incentive to keep you powerless so they can keep siphoning the value you’re creating, but ultimately you’re the one who chooses to walk through that door each day. You don’t have to keep doing that. You can get up and leave right this minute if you want. Many people are much happier for having done that.

You are the final arbiter of your desires. If you want something with a price tag, you have the power to earn the money to pay for it. You decide how much you earn. You decide how much you spend.

When you realize that you choose your income, you can focus your energies on creating and delivering as much value as it takes to earn whatever you want. Be intelligent and deliberate about it. Make abundance a priority in your life. This is a lot more fun than fussing over expenses and nitpicking your taxes. Once you develop a modicum of skill, you’ll find that it’s a lot more fun to earn an extra $10K than to save $10K. You can earn $10K in an hour if you develop the mindset and skills to do so. No one is stopping you from doing that.

Stop Fussing Over Expenses and Taxes

When it comes to reducing your expenses and taxes, you have to do a lot of tedious work. It’s not fun, at least not for any sane person I’ve met. Yet people with a scarcity mindset spend a lot more time nitpicking their expenses and taxes than they invest in boosting their income. Not a good trade off… not by a long shot.

When you try to minimize your expenses and taxes, you’ll eventually reach the point of having to make tough calls that could reduce your quality of life. On the expenses side, you may have to do extra expense tracking and budgeting, which takes time. Or you may begin to sacrifice quality to save a few bucks on your purchases.

On the tax side, you’ll have to fill out more paperwork and do more accounting to take advantage of more deductions and save more money. Is that really what you want to spend your precious life doing?

Consider that when it comes to expenses and taxes, you have a hard limit of $0 and can go no lower. Once you’re spending the bare minimum, that’s it – you’re done. So your maximum ideal gain is to spend nothing at all. And even if you could take things that far, your quality of life will surely suffer. You’ll be wasting so much time going out of your way just to save a few extra dollars here and there. Sacrifice and scarcity will be your constant companions. That’s no way to live.

In the long run, it’s much more productive to focus your time and energy – not to mention your precious life – on the side of generating more income. You have no hard limit on that side. For all practical purposes, the sky is the limit. With commitment and persistence, you can boost your income by many multiples of what you might save on the expense and tax side.

Working on the income side is a lot more fun to boot. You get to spend your time creating value and receiving money with gratitude instead of worrying about whether or not you can afford to splurge on organic produce.

For my taxes, I pay an accountant to do all the paperwork for me. That costs extra money, but I don’t worry about it. I also procrastinate endlessly when it comes to doing any sort of accounting work. I do the bare minimum I can. I keep everything in good order, but I don’t balance the accounts very often. At tax time I let my accountant work his magic to figure out the best deductions for me, but if I have to do extra work that I don’t want to do just to save a little more money, I simply decline. That way I get to spend more time on the value creation and delivery side, not to to mention the enjoyment of life side. The pay is much better on that side, both financially and emotionally.

Last year my accountant told me I could save more money by deducting the business use of my car. All I’d have to do would be to keep track of mileage when I drive my car for business reasons. There may have been some other ways to claim this deduction, but they still required me to do more tracking, analysis, and/or paperwork. That seemed like a stupid waste of life, so I told my accountant to skip that deduction – not worth it to me. I’m not going to waste more time on stuff I don’t enjoy just so I can save an extra thousand dollars on my taxes. The IRS will surely have no trouble taking the extra money, and I’m happy to spend my time doing more of what I enjoy, which will easily enable me to earn enough money to cover that missed deduction many times over. I’d actually lose money if I tried to take that deduction. It’s yet another sucker bet for those who choose to live in scarcity.

When it comes to my expenses, I don’t maintain any sort of budget, either on the business side or personal side. Budgeting is boring to me, so I don’t do it. I simply spend whatever I feel like spending. When my expenses rise, expectedly or unexpectedly, I don’t worry about it. I don’t have to worry. I know that if I begin to overspend, I can always restore balance by over-earning just as easily.

Earning money is fun. Spending money is fun. Both activities are interchangeable. Fussing over expenses and taxes isn’t remotely fun, so that isn’t part of the equation – that kind of stuff gets triaged.

My latest credit card bill for my business is $1010, which is on the low side. Most of it is stuff that gets auto-billed each month. I was too busy earning money that month and didn’t have as much time to spend money. The bill before that was $6900. Ah yes, the Bermuda conference. I had a lot of fun spending money that month. The bill before that was somewhere in between. My personal credit card bills fluctuate similarly. Every month I pay off every balance completely, so there’s no revolving balance and no interest charges.

I “waste” money on unnecessary expenses all the time. I overspend on little things. I don’t fuss over trying to save money. I assume that whatever I can spend, I can earn. That wasn’t always the case though – it took years to train up to the level where I could earn enough to cover my desires.

Years ago I had a friend who absolutely hated waiting in line. He saw it as a personal insult. He used to say that all stores and restaurants should have a separate cashier for people who are willing to pay 50% more, just so they’ll never have to wait in line. I thought he was nuts at the time, but he was simply trying to maximize the value he got from life. Waiting in life sucked too much value away.

I really don’t know how much money I earn each month because I only look into it a couple times a year. It’s just video game gold anyway – doesn’t really matter what the exact figures are. I have a general feel/vibe for how the cash is flowing week by week, and in terms of spending I do my best to go with the flow. Is my bank account growing or shrinking? I like to see the numbers keep growing. I check my account balances a couple times a week to take their pulse. I earn money from multiple sources pretty much every day, so my checking account is perpetually refilling itself, but I want to make sure there are no big surprises like fraudulent charges. Some months it’s hard for me to guess what I actually earned within +/- $5K. I simply don’t care to keep track. It’s somewhere in the tens of thousands each month, more than enough to live off.

I do the same with my book. I have no idea how many copies it’s sold. Can’t even fathom a guess within +/- 5K copies. I haven’t asked my publisher for a sales update this whole year. It’s great that we’re up to a dozen languages for translated versions, but as for the money and sales, I don’t really care. I’ll sort it out when the royalty statements start coming. It will be more fun to be surprised.

Even though this may sound financially irresponsible, I think it’s just the opposite. My bills always get paid. I’m paying down my mortgage much faster than necessary. My car is 100% paid for. I’m sharing this with you because it actually works, even though it may sound counter-intuitive.

Managing your finances in real life – the fun way – is very much like earning gold in a computer role-playing game. Earning money is play. Spending money is also play. If you aren’t having fun, you’re missing the whole point.

I think it’s truly irresponsible to waste your precious life on things you don’t enjoy, like fussing over your expenses or taxes. Does it feel good to you to sacrifice quality of life to keep a tight grip on your finances, when you could be making plenty of money if you simply spent more time doing what you love and providing value for others? Would you rather do something creative and have plenty of money to splash around, or spend your time dealing with cheap items that keep breaking down? I think you deserve the best that life has to offer you, but you have to step up and claim it. No one is stopping you from doing that.

Cash Reserves

Suze Orman recommends maintaining a short-term cash reserve (not counting long-term investments) equivalent to about 6 months of expenses. I think that’s a wise idea. A decent cash reserve gives you a lot more flexibility, whether your income is fixed or variable.

I maintain a liquid cash reserve at all times to have a cushion for any unforeseen expenses. I like to see that reserve be at least $50K, preferably closer to $100K. That way if something unexpected happens like a wacko filing a frivolous lawsuit because he spilled boiling water on himself while attempting my brown rice recipe… or crashed his car while attempting to drive after a week on polyphasic sleep, I can easily afford a decent hitman. ;)

When your income source is fairly vulnerable, like if you could get laid off or fired and spend a lot of time out of work, you may want to maintain a bigger cash reserve. But when you assert more control over your income and maintain more options for responding to financial setbacks, you don’t need as big a reserve.

If you have multiple streams of mostly passive income, and if it would take a major upheaval to threaten those sources even if you stopped working for a while, you may be fine with a 2-month cash reserve or less. If I suddenly need more cash, I have lots of options that could easily be implemented in less than 60 days. I could do another joint-venture promotion. I could create and sell an info product. I could do another book deal and get an advance. Even so, when I focus on feeling abundant, I naturally attract a bigger reserve than I need.

Cash reserves are useful because there’s a lag between creating and delivering value and receiving income from it. Some income sources have low lag time. For example, when someone registers for my workshop and pays by credit card or PayPal, the money is in my bank account within a few days. Some sources pay monthly, such as affiliate deals. Others pay quarterly, semi-annually, or less frequently, like book royalties. Some pay “whenever.” A cash reserve helps to smooth out fluctuations. It also keeps you from incurring stupid bank fees from bouncing checks. Having a bank balance that’s too low can lead to a lot of time wasted as well as unnecessary stress.

How do you build a cash reserve? You can get there by skimping on expenses, but that gets really tedious and boring after a while, so I don’t recommend it. Focus on creating more value, training up your value-creating skills, and building a bigger client base for whatever service you provide. It all comes down to getting better at creating and delivering value.

I certainly didn’t make sacrifices to build a cash reserve. I just kept doing what I enjoyed. I stayed alert for new ways to express and deliver value to people. Sometimes it was as simple as asking, “What else can I write about that could help people in some way?” I didn’t have to focus on earning money. When you get good at creating and delivering value, money finds its way to you.

Luck or Choice?

Why do I find myself in this “lucky” situation where I get to do what I want, earn what I want, and spend what I want? If you think luck had anything to do with this, you’re crazy, deluded, and otherwise insane. This happened by choice. I created this career and financial situation deliberately. It wasn’t easy to figure out how all the pieces would fit together – it took years – but it was definitely worth it.

How long it takes you to hit your desired financial stride is irrelevant since the time is going to pass anyway. You can spend that time creating the life you desire, or you can stay stuck with something you don’t want. You might as well work toward what you desire, unless you want sacrifice and scarcity to accompany you all the way to the grave.

Recognize that a fixed income is a sucker bet. It’s like drinking soda. It doesn’t matter that lots of people do it – that doesn’t make it any less dumb. There’s no good reason to sacrifice yourself to line someone else’s pockets. Don’t be a sucker.

You’re free to opt out of the fixed income sucker bet whenever you want. When you do this, rest assured that the other suckers in your life will bark at you for pouring lemon juice on their cuts, and the higher ups won’t appreciate that you saw through their scheme. But you’ll be free to decide how much you earn. You’ll be able to write your own paycheck, not with airy-fairy wishful thinking but with a commitment to creating and delivering the best value you can, regardless of how you choose to express yourself.

Of course having a variable income isn’t all fun and roses. It takes time to get the hang of it and to get a good feel for how to balance the flow of earning and spending. It took me about 5 years before I achieved basic competence with it. I made tons of mistakes during that time, but I learned from them. After that it was pretty easy to maintain stability.

If you pursue this path, maybe you can figure it out in 2 years. Maybe it will take 10. Again, the time is going to pass anyway. If you drop the fixed income mindset, you’ll end up in a pretty sweet place once you eventually figure it out.

As you probably noticed, I made up some words in this article. You’re free to coinify your own words too. This is your reality after all. You make the rules. Just as you can subscribe to other people’s verbal patterns, you can also subscribe to other people’s income patterns. But you don’t have to. You never did have to. Just because a pattern is popular doesn’t mean it’s the best pattern for you. Give that some thoughtification. :)



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