This article is an excerpt from the Shortform book guide to "The Almanack of Naval Ravikant" by Eric Jorgenson. Shortform has the world's best summaries and analyses of books you should be reading.
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Why should you have passive income? What can passive income do that active income can’t?
Working for wages is no way to achieve financial freedom. That’s the view of Naval Ravikant, who argues that passive income is the way to go. He explains why that is, and he identifies what he thinks is the best way to generate passive income.
Keep reading to learn Ravikant’s view on why passive income is important.
Naval Ravikant on Passive Income
Ravikant argues that the key to achieving financial freedom is having passive income. This is income that earns money with minimal effort from you. According to Ravikant, the best way to earn this income is by owning assets: For example, selling an easily reproducible product—such as a popular album of original music—is a source of passive income. Similarly, owning equity in a growing company provides passive income: As the company grows, the value of your equity grows. This type of income contrasts with active income, which people typically get as wages for work.
(Shortform note: Developing passive income is considered an important strategy for building wealth, but most financial experts suggest some principles that can be more essential to reaching financial freedom. Specifically, experts recommend you save money. Passive income can be used as a strategy to increase your savings, but the more essential idea is that you need to spend less than you earn. Bearing this in mind, you might consider some other ways of saving money—such as simply earning a higher salary and reducing your household expenses.)
Ravikant explains why passive income is important if you want to build wealth over time. Most jobs earn wages but, to Ravikant, you’ll never get wealthy and achieve financial freedom by working for wages. This is because wages grow linearly—that is, the amount of money you earn is directly related to the amount of time you work. By contrast, passive income streams have the potential to grow nonlinearly: Over time or under the right conditions, they can generate more income per unit of time than wage work can. For example, if you publish a book, you may at first sell only a few copies each week but, in time, you could end up selling hundreds or thousands of copies each week, generating more income with each sale.
(Shortform note: Contrary to Ravikant’s claims, it is possible to build wealth by working for wages. In a survey of over 200 wealthy people, nearly 40% of respondents built their wealth working for wages. The key, in many cases, was how those people chose to save or invest their wages. This is in keeping with Ravikant’s suggestion that owning assets is important for building wealth—by putting that earned money to use, those wage earners amassed a fortune over time.)
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- Millionaire Naval Ravikant's advice on how to build wealth and happiness
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- The habits to adopt that will lead to happiness