The Money Strategy of Unpegging Our Income

Posted On 1 November 2022

Last updated on April 10th, 2024

How is it that the government wants inflation? OK, not too much inflation, but 2% is what they aim for. Let’s take a look at what we can do to work our money strategy like the government.

Spoiler Alert: This is not about spending money like the government!

Governments with a stable currency will peg (or link) their currency to something with value that remains constant. When they unpeg their currency, it becomes “free-floating”. They can manipulate it as they want. Why don’t we apply this unpegging money strategy to our lives?

Common Income Definitions

To make sure that we are all on the same page, let’s go over some definitions. These definitions come from Investopedia.

Active Income – Is defined as income earned from performing a service such as wages, salary, tips, or commission. Most people have active income. There is nothing wrong with active income. The biggest downside to this type of income is that it is limited to our own efforts and time.

Passive Income – This is income generated from little to no active work or labor. Think renting out real estate or royalties. The income can come as a result of a single purchase, such as dividends from a stock or real estate. Passive income is talked about a lot because it is not restricted by time, or our efforts. It has the potential to be unlimited income for you.

What about income that is a combination of both? Real estate usually takes at least some work to keep it up. Yes, that work can be hired out. Authors and musicians need to promote their work. Business owners are a real combination of both types of income.

Gold & Dollars

Gold and silver have been used as currency for a long, long time! Since metal coins can get heavy, paper notes were used as a more convenient way to carry wealth. These notes could be exchanged between others, or they could be exchanged for gold or silver.

The United States dollar was backed by silver, gold, or both starting with the Coinage Act of 1792. You can read about the changes in American coins and currency over the years here. In 1971 President Nixon took the United States off the gold standard. This was when the US dollar became a fiat, or free-floating, currency. There is more to the story then just making a wild decision. This article covers it quite well.

There are other ways that a country can have its currency backed by stable wealth. One of the most common ways is by pegging their money to a foreign currency. The US dollar has been used a lot for this!)

Dollars to Dollars

A country can use another country’s currency to back theirs. Canada pegged its dollar to the US dollar between 1858 and 1938 and again between 1962 and 1970. Canada has chosen to have a free-floating dollar so they can follow their own monetary policies.

For a pegged currency country to increase the money supply it had to add to its reserves. This is a great way to maintain a stable currency. The problem with a currency that is backed by a stable store of wealth is that it cannot be easily manipulated.

The decision to unpeg a currency is a dangerous one. There is the temptation to just print add more money without any additional wealth to support it. That’s how we get inflation! While there is the freedom to run the currency as they want, there is also the real possibility of wrecking the economy.

Time and Money

For most people, their income strategy is pegging their money to time. We get paid by the hour, day, week, or month. If we want to earn more, we need to trade more of our time for it. The problem is that there are only 24 hours per day. We cannot add any more time.

Even though time limits our earning potential, it is a constant that we can use. It does provide a good measurement for us to gauge our work. When we unpeg our money from time we can loose track of whether or not we are working on something profitable. There is no ceiling, and there is also no floor. This means that we can earn a lot, or we can work for nothing!

Unpegged Income

I don’t like the term “Passive Income”! It sounds like we don’t have to do anything for it. There is usually work involved, and it’s often at the beginning.

When we unpeg our income, we severe the tie between time and money. An author spends a lot of time writing a book. He makes his money after the book is published (and sold!). Often, the author spends time promoting his book after it is published. Even though there is work required after publication, the money from the book can still come in decades later.

Another example of unplugged income is a business owner. There is a lot of work (usually unpaid) at the beginning of the venture. As the business grows and becomes profitable his income increases. With good employees working, the owner can have more discretionary time available.

Salesmen also have unplugged income strategy. So do investors, traders, and artists. There are many ways to cut the tie between your money and your income.

Inflation & Income

An advantage of unpegging our income from time is that we are not as affected by inflation. Our income is a percentage of the sale price, or we can adjust our prices to the current market price.

We can also use debt to our advantage! By burrowing higher value dollars and paying back with lower value dollars, we come out ahead. That is because the borrowed amount is the same, yet we are now earning more.

Multiple Sources of Income

Unlike the government, we can have both pegged and unpegged income at the same time. We can work a job while we are writing a book or working on a blog. This can allow us to earn money still while we are building up our unpegged income.

We are used to pegged income, which tends to be linear. Unpegged income is not linear, just as there are no floors or ceilings. We can work for free, then see our income double, triple, or more. Working for free is another possibility as well.

Unpegged income is completely unconstrained and limitless. That can be both good and bad. We put ourselves in control of our income. It can change as we want or need it to change. Our income though, is also correlated with our contribution to others. We are paid in proportion to the value we provide people.

I encourage you to stop calling it passive income and start calling it unpegged income. This can get us looking at the income strategy in a different way. Join me in the pursuit of unpegged income!