Absolute Income Vs Relative Income

Income, salary these are things which an individual or business receives in exchange for providing goods or services. Most of us have a job as an income source where we all are getting paid for engaging our time and skills.

The job is an absolute income source. For some of us, it a good relative income. But the question arises in your mind right now are ... 

• What is the absolute income?
• What is the relative income?
• Which one is more important? 
• Is my income/salary absolute or relative?

Let's look at this 5th standard math problem. Two persons say, Alex and David. Alex works in an MNC and makes Rs. 10,00,000 per year and David, who run his online business and makes Rs. 5,00,000 per year. Here, we can easily say that Alex is twice as rich as David.

Alex

David

 

Now, Let's take a look at the below analysis...

• Alex makes Rs. 10,00,000 per year that is Rs. 20,000 per each week of 50 weeks per year and works 80 hours per week. Thus, Alex makes Rs. 250 per hour.

• David makes Rs. 5,00,000 per year that is Rs. 10,000 per week and works for 10 hours per week and hence makes Rs. 1000 per hour.

Now here, if we see then we can say that David is four times richer than Alex.

David who is four times richer than Alex as long as money and time are concerned

Absolute income uses one unalterable variable that is "money" (Which we used and concluded that Alex is twice richer than David) whereas relative income uses two variables: money and time in hours (By this, David is four times richer than Alex). The whole "per year" concept is arbitrary and easy to trick yourself. 

Here you can see that though Alex is earning more per year but his per hour income is much lower than David's per hour earning. David works only 10 hours per week and saves 70 hours per week and 3500 hours per year (Approx. 146 days per year).

Result…?

Now friends, just think what David can do in those 70 hours he saves weekly and what he can achieve. May be he could start another side hustle which will generate extra money for him; he could spend much time with his family and friends and can live each day happily.

David has both time and money

Whereas, Alex doesn't have that much time to spend with his family and friends. He works to live for weekends. He hardly could start any other source of income. In short, he is earning money but not able to spend it for his happiness.

Alex spends most of the time in earning money so he does not have time for other important life factors

Geo-arbitrage: 

There is a concept of Geo-arbitrage which means relocating to the city or country where you can take the advantage of the lower cost of living. Let's see how it affects to both of our friends.

Alex works for MNC which is situated in a Metro City like Bangalore. He has to take his flat on rent near the office to avoid the traffic whose rent is more than Rs. 10,000. If he is not willing to pay that much rent then he has to take his flat away from the city but could stick in traffic every day. Alex has to spend money on traveling, rent, food, etc. So the cost of living and expenses are very high for Alex as he lives in a metro city and not able to save much money.

Alex works for MNC

Whereas, David runs an online business. What he needs are just a Computer or laptop and a good internet connection. He can run his business from anywhere in the world. He does not need to live in a metro city and can run his business from a small town. So his expenses are lower than Alex.

David's online business makes his life easier and flexible

In short, David can have his lunch/ dinner in a 5 star hotel 6 times a week but Alex can afford only one lunch/dinner in 5 star hotel once in a week.

Geo-arbitrage means leveraging the economic difference between markets to generate high returns which is possible only for David and not for Alex. 

Of course, relative income has to add up to the minimum amount necessary to achieve your goal. If I make Rs. 1000 per hour and works for only 2 hours per week then it is going to be hard for me to live my day today life.

Time is as important as money

So friends, I hope that you have got the clear idea about absolute income and relative income. Relative income is more important than absolute income as it considers one of the most important factors of your life which once passes never comes back and that is TIME.

Now, you people can easily analyze whether your salary/income is absolute or relative. If it is absolute then you need to work on how your income will become relative.