Income and wealth are not the same. We should want both.
One can create the other. First, we can invest income above our expenses as capital to acquire accreting assets. Everyone should do this. When possible, we should try to cut our costs to allow more income to become capital. Of course, this is easier said than done for many, so a "should" is not an "always."
Second, wealth can create cash by selling the asset, borrowing against it, and collecting dividends. The former is a one-time sale: we lose wealth to pay short-term bills. The middle is essentially a mortgage - get a pile of money advanced to us secured by the asset, and we pay interest on that loan. This loan is best used as cash to generate more wealth to make sure the note gets repaid. The last is the style of an annuity. Annuities are not usually as high-growth as non-dividend paying investment options. If the underlying business keeps investing in growth, they don't have the cash to pay shareholders.
But while they have interrelationships, for many of us, we look at a fork in the road ahead as "do I generate income" or "do I generate wealth?"
The reason we make this distinction is the matter of risk. When we need cash to live, we look at wealth and income very differently. Income represents ongoing safety. If you have income, you can pay the bills that allow you to live in a home, feed yourself, care for your family, and hopefully fund the activities and causes that give you meaning. Income means that this cash is available to you in a flow that continues for the indefinite future in return for some allocation of effort and capital.
Generating income at a base level is straightforward: get a job. Day jobs are lovely for entrepreneurs because they take risks off the table in return for some share of one's time. In return, they usually require "full-time" focus from the would-be entrepreneur, squeezing out time for wealth-creating activities. A second risk is intellectual property assignment: working as a technologist for a tech company might involve an employee agreement that assigns all ideas from the employee to the employer. If you are interested in keeping your options open, read this carefully.
One step removed is to be a contractor or consultant. The risk to the entrepreneur goes up as a consulting client does not have the employer responsibility to you that they would have in other contexts. In the USA, we would describe this as the distinction between W2 employment and 1099 consulting. The benefit is sometimes one can get a higher rate as a consultant in return for taking on this risk. Further, part-time arrangements are more common in consulting relationships, allowing more time for other, wealth-generating activities.
While a contractor is technically a business, the business only generates income while you are working. The wealth creation above the value of the revenue is zero. That lack of excess equity value is why consultancies are so hard to sell.
Then there is wealth creation. I think of this in two categories. First, learning hard secrets is to increase one's valuable intellectual property. Talking to the market, conducting experiments, and reading - a lot - will create intellectual capital to serve people and capture some of that value created. One can and should spend money to get closer to these secrets, but in the main, the cash part is pretty cheap - it is the time investment that is nontrivial. An excellent hack is to pick a job that will pay you to learn this valuable knowledge.
Second, building products and services to convert that knowledge into value for customers will create machines that generate money. These machines will serve both the customers and you. When Naval Ravikant describes code and media as capital types, I imagine he means this phenomenon. One can apply combinations of time and money to this building. Often it is the secret accumulation that requires more time, and the building/distribution uses more money. A check for yourself: are you spending most of your time on learning or building? If the latter is without the former, revisit.
We should acknowledge that many people don't balance the above. Maybe they are focused on having a good income and the safety that comes with it. We should respect that life decision! Many people will make excellent incomes and build up savings they can deploy as capital by doing their work well. Most successful people are in this mode for the majority of their careers - if not all. Some of the wealthiest people I know are senior employees showered with cash and stock for the value they bring to their institutions.
Some others have the benefit of not requiring income because they have some backstop. A trust fund is a superpower, as is the ability to live a very frugal lifestyle. The less money you need to live, the more capital you can deploy to your efforts.
There are multiple ways to balance the goals of income and wealth. First, one can operate serially. Get a job, save the money, and then do a startup for a while. This one-after-another approach allows intense bursts of energy into startup endeavors - with a clock. When you run out of money, you go back to finding and working a day job. I have seen several entrepreneurs take this route. Some successfully, but the clock reduces one's odds of compounding success.
A second path is learning a ton, gaining market credibility, and saving for the next venture. This path has high odds of success since it is getting funded from the word go. The course is somewhat serial, but the "have a job" part permits learning and gaining credibility in an important domain. Intellectual capital is essential! Understanding and then being understood is high-value.
A third path is to build a portfolio of income-producing and wealth-producing endeavors. For example, one might start a job or consulting to generate current income for a period. Then add a product building exercise to create intellectual property value. Top it off with serious time spent learning both technical and market knowledge.
This mix can change over time. As more income arrives from products - essentially dividends on your wealth - you can spend more time on wealth creation through learning and serving the market. One's capital accumulation accelerates.
This last is the path I have chosen for myself. Some founders who are "all in" on "building" should consider it too. Combine learning, serving, and earning to generate both income and wealth. This path serves both the short-term need for lifestyle and the long-term desire to build something valuable.
All this discipline starts with a self-examination: what am I doing to generate income? What to generate wealth?
Photo by Michael Longmire on Unsplash