Residual Income

Written on June 15, 2011 No Comment

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This 10 minute animation is based on Burke Hedges’s best selling book, “The Parable of the Pipeline: How Anyone Can Build a Pipeline of Ongoing Residual Income in the New Economy“

It is the story of two friends from the same village, Pablo and Bruno, who had very different ideas about how to make money – “quest for financial independence”, says the narrator.

Both were young and full of dreams. And as young, aspiring people usually do, they would tell of the days they were going to be the most successful and wealthy people in the village.

They looked for ways to make money. Until, one day, they found the ideal opportunity.

The Opportunity

The village where Pablo and Bruno lived ran out of water. The village was located on a mountain top and the nearest water source was across a deep valley, at the peak of a another mountain top.

The mayor decided to hire two people to bring water from the nearby mountain peak to the village. The two employees would be paid based on amount of water that they delivered. The logical thing would be to walk from the village to the water source with empty buckets, fill up the buckets at the water source, and haul the filled buckets back down the mountain, through the valley, and back up to the village.

Bruno and Pablo applied and were chosen for the job. They worked hard, hauling water all day long – “from morning ’til evening.”

More Money, More Easily

Bruno was very satisfied with how things were going. He had a plan and was sure that he could achieve his financial goals if he kept hauling the water-filled buckets. In fact, he had an idea that would help him haul more water during each trip – bigger buckets! Bigger buckets, more water, more money was what he thought. He saw this as a quicker way to achieve his financial goals (cow and house of his dreams).

Pablo, on the other hand, was not satisfied. He didn’t like that his hands hurt and how exhausted he was every evening after work. He, like Bruno, began to think of ways to make more money, more easily. Unlike Bruno, however, Pablo thought of creating a pipeline that would bring the water directly from the mountain to the village so that the water could flow non-stop without having to carry the water back and forth, everyday.

Pablo began to plan the pipeline and even told Bruno about it. Bruno thought Pablo was crazy. Bruno was happy with what he was doing and thought that helping Pablo would only get in the way of this goals.

Bruno continued as he was – bigger buckets, more trips.

Pablo, on the other hand, began building the pipeline all by himself. He knew that it would not be easy to build and that it could take several years to complete “but he set his mind on his goal.” Everyday he went to work, hauling buckets, as he had been before. But on weekends and in his spare time he worked hard to building his pipeline.

It was not easy and at first he had very little to show for his efforts. Every one in the village, including Bruno, laughed and teased him for spending all of his spare time on such a ridiculous task.

Reaping the Results

While Pablo was busy building his pipeline, Bruno had already bought his cow and dream home, and was now enjoying his free time with friends and family.

But this changed as the years went by. Bruno’s body was beginning to tire from carrying the big buckets of water. The only thing he could do was to carry less and less water every time he made the trip from mountain peak to mountain peak.

In the meantime, Pablo had completed his pipeline and could now deliver water non-stop. He was “now earning more money than ever before.” The water flowed and Pablo didn’t have to bring it. It flowed while he slept, ate, or played with friends. And Pablo was paid as the water flowed.

Build Your Own Pipeline

Now you understand the power of a residual income.

Often, when people think about making money, they tend to think about working, exchanging their time and effort for a paycheck. People go to work from morning to afternoon and perform some repeated task in exchange for payment at the end of the pay period (usually a 15-day period).

People spend their money on clothes and transportation to help them perform better at their job. They associate with their coworkers and spend their money on things they have always wanted to have (a sports car, a dream home, college education for their kids).

But employees are limited by effort and/or time. It’s true that working harder can get you a raise and working longer hours can get you overtime pay. But sometimes neither a raise nor overtime are available. When faced with this, many people get a second job. But the hours of the day still limit the amount of hours they can work. Their body needs to rest, leaving a maximum of 18 hours they can work each day (if they sleep an average of 6 hours a night).

Employees exchange time for money – like Bruno. But what happens when time can no longer be exchanged for money (illness, age, unemployment, etc.)?

Entrepreneurs, on the other hand, find ways to exchange their time for passive income (residual income). Passive income is income that is planned and worked for once and continues to pay for the rest of the entrepreneur’s life. “Pablo knew that one day, maybe because of age or health, he would no longer be able to exchange his time for money. Pablo knew that if he could make his idea of a pipeline work, then he only had to do the hard work of building the pipeline.”

“To earn an income, we don’t always have to directly exchange time for money. There really are better ways.”