Say No to Linear Model of Income!

As far as revenue is concerned, while product companies have almost always followed a non-linear model of revenue, service industries have predominantly stuck to a linear model. A linear revenue model is one where revenue from a project/division is dependent on the number of resources deployed and the amount of effort expended. So service industries basically recruit and deploy more employees in order to increase their revenue growth. However in a product company, the team expends a one-time effort to design and develop each product. After the product is put into the market, the product earns revenue multiple times over the efforts and costs expended in developing it. This is non-linear revenue model of revenue.

 

But now even service companies are shifting towards a non-linear revenue model by automating their operations, focusing on reusability and retaining only the core-skilled employees. Then why are we still working on a linear model of income? 

 

While no such term exists, I would say, a linear model of income is the salary you get (or the money you earn) only until you physically work for it. So if a person holds a salaried job until his retirement age, then he is drawing salary in linear model until then. A linear model gives a satisfaction of accomplishment and a sense of being prepared initially, but will not be effective in the long run, especially when one works in a private organisation that is devoid of benefits that one can otherwise enjoy working in a government or public sector.

 

So what kind of investments does a private company employee think of to improve his financial status? 

 

Here are some of the top investment/saving mechanisms that salaried professionals are going after these days:

 

Provident Fund and its derivatives

Mutual Fund Investments

Real estate

 

Provident Fund is seldom used for the purpose it is meant. Most of us close PF accounts when shifting companies so that we put the money to some other emergency use at that point of time. Now let us assume that a person starts working in a private organisation at the age of 25 and retires at 58, putting in 33 years of service. Let us assume an average PF saving of Rs.10000 per month (employee and organisation contribution together) for all the years (please note that I am considering it as an average). So it is Rs.1,20,000 per year on PF savings. And it would amount to approximately 40 lakhs at the time of his retirement assuming that he has not withdrawn PF amount during his earlier working years. If the person lives to a good 85 years of age, then 40 lakhs is not going to be sufficient for his sustenance over the next 27 years post retirement.

 

Now how about mutual fund investments? The story is more or less the same here too. A good percentage of us invest in mutual funds basically to evade tax. Assuming that a person is able to afford two investments that amount to a premium of Rs.10,000 per month, which would be Rs.1,20,000 per year, then the sum assured in most cases is around five lakhs per investment at the end of the maturity period. I am considering a regular 5- or 7-year term policy that matures in 20 or 25 years. Again, such a policy is not going to provide enough funds to sustain life post retirement, while it can help you evade income tax and provide you some coverage in case of death or accident.

 

Now on to real estate. Everyone is more than eager to tap the real estate market as soon as they land themselves a job, thanks to effective marketing as well as our own nature to compare our lives with that of others. We believe that real estate is the real deal, an appreciating asset that we can always rely on. That is actually a myth. Real estate is actually a liability, and its value is fluctuating, based on market conditions. Moreover, even if you consider it to be an appreciating asset, you will make a profit out of it only if there are buyers. When the economy goes down and money is scarce, almost everyone who owns a property is going to consider selling it based on their financial situation. With supply more than demand, the prices will be bargained and takers for the property are not going to be easy to come by. Also, with money put into real estate, the funds you are going to have for the above-mentioned investments is going to be tight as well. And the sad part here is, you purchase a property considering it an asset, let it out for rent thinking that the rent will pay for the EMI and continue to live in a rented house yourself. With inflation and escalating real estate prices, the rent from a property will never equal the monthly loan payments for the property. And finally you end up shifting to your new own house after it is a few years old already.

 

Now that we have seen how the above ‘investments’ will actually work out for a salaried professional, let us consider the typical psyche of the salaried professional. We want to believe that our salary is going to sustain us, pay for all our wants and needs, and also provide savings for the rainy day in the future. We try so hard to believe that we are making the right investment decisions based on the brochures and the marketing talk sold to us by investment executives. We have no idea what it’s actually like to retire from a private firm (I’ve written my views about it in an earlier note in Facebook). We think that we can make good all these financial challenges by taking up onsite opportunities. While it works out for a few, not everyone can land themselves in an onsite role. And with the new outsourcing policies in discussion worldwide, there are challenges in that as well now.

 

Most often, the logical route a salaried professional will take post retirement is to invest his money and try to get a regular income from it. However it is not the age to take financial risks. And it is definitely not a suitable age to start thinking afresh about starting up a business. While nothing is impossible, it is still very challenging at that age to move to a non-linear income model when you have been used to a linear income model most of your life.

 

This is why we need to adopt a mindset to set up a non-linear mode of income for ourselves much ahead in our life, when we are still young and healthy. While you can continue to be employed, it is always wise to consider setting up some business alongside, even if at small scale, to open up an income channel. And make any expenditure using the income from the business and reserve the salary for investments using the other modes I mentioned about above

 

With employments becoming a challenge, competition increasing, inflation exploding and society shrinking, it is important to discover those additional ways of income rather than depend on one source of income: your salary.