Two Sources of Income (life of PI)

There are only 2 sources of income you can make during your life. One is from your personal exertion, the other one is from your assets. Personal exertion income (PEI) is the income you make from your physical work whilst the income from your assets, such as superannuation, investment properties, shares, businesses, books or other intellectual products etc, that does not require your physical inputs is called passive income (PI).

PEI starts when people reach 20 to 25 years old when finish their education and begin a career. As more skills gained and experiences accumulated, PEI rises accordingly, and it usually peaks when you reach 40 to 45 years old, and then plateaus even declines afterwards until 60 to 65 years old. Then all of a sudden, it stops, voluntarily or involuntarily because people retire.

PI comes from your assets, it begins with very small or even zero as you start acquiring the assets. As time goes by, it will slowly go up. But because of power of compounding, it will grow gradually and become a significant amount as long as you keep acquiring and accumulating income generating assets for long enough. The ideal scenario is your PI can reach the level of your PEI when your PEI stops, in this case, your PEI will be replaced by your PI, which will then sustain your lifestyle by providing an ongoing income source for your future living and retirement. This is called the financial independence.

In Australia, the only mandatory asset that every working person gets is superannuation, but we all know, superannuation is not enough to satisfy a comfortable retirement needs by only having the compulsory contribution amount. You have to either top up your super contributions or invest in some other asset classes should you wish to get your PI sufficient enough to replace your PEI when reach your retirement.

To become financially independent and not rely on the government or anyone else, you need to build up both of your PEI and PI while you are physically working. Many people only focus on building one, their PEI. Financially successful people pay attention to both, PEI and PI, and work out their life backwards. They calculate how much they would need to sustain their lifestyle and then discipline themselves to keep saving and investing in the income generating assets until their goal is achieved.