I doubt I’m alone in dreaming about a day where I would not need a job to live my best life, travelling, watching tennis, spending time with my loved ones and so so much more. I’ve had that dream forever. It’s not even about not having a job, but rather about not needing one. When I read “Rich dad, Poor dad”, it opened my eyes to a world I had not known about. I set out to make it happen but every journey is different. I set this blog up to tell you about my journey and help anyone interested in reaching their own goals. I intend to expand this guide over time with practical steps and my own insights.
One of the very first and critical steps in discussing my journey is for us to agree on what passive income is. Some, such as myself have built a life based on the principle while many others don’t even think it exists. Let’s start with what Wikipedia has in mind:
“Passive income is a type of unearned income that is acquired with minimal labor to earn or maintain”
That seems fair to me, basically passive income is money i will earn that is not a function of the number of hours worked and that ideally requires very little in terms of hours worked.
The Actual Mirage
There is no such thing as creating an “overnight passive income”. What is true is that building passive income does require investments, usually of both capital and time. But I do think that too many people actually make a plan and get started. This does not require having millions of dollars or even having a crazy 6 figure job. Almost anyone can get started, even kids. The actual steps are not rocket science.
1-Determine how through labor or changes in spending/earning, one can set aside a monthly amount of cash, no matter how big or small
2-Have an investment plan that transforms that money into a stream of future income (investing etf’s and dividend stocks is one great way to get started)
3-Over time, ideally increase the monthly amount through reinvesting part of any additional cash flow
4-Reinvest any income generated by that portfolio
Why Passive Income?
Sure, I have a job that I enjoy doing, that pays me well and that I could keep doing for a good while longer. But I do like the idea of being completely independent. If a family member becomes sick and I want to take care of them, or I need/want to reduce my working hours or travel more in the next year? To me, having an increasing portion of my income be passive is critical in having peace of mind about the future.
Types Of Passive Income
When I was looking for Wikipedia’s definition of passive income, I was afraid of what kind of results i’d get when looking on google. Why? Because this is the type of search term that will attract scams/spammy results. Up first was an article from Time magazine about 11 ideas for passive income. Curious what their ideas are? Comments next to them are mine:
-Real estate investing (not my cup of tea but fair)
-Invest in art of alternative investments (this is #2??)
-Sell designs or art online (doesn’t seem very passive to me)
-Investing in a high-yield savings account or certificate of deposit
-Dividend stocks (now we’re talking!)
-Affiliate marketing (??)
-Peer-to-peer lending (??)
-Real estate investment trusts (sure)
-Rent out parking space (unusual idea…)
-Rent out a room in your home (seems very related to real estate)
-Create an online product (not so passive)
First off, to me, these seem to get mixed up between passive income and gaining leverage. Sure, having an online business (or any other business for that matter) is attractive because the income generated becomes mostly unrelated to the number of hours worked which is a great feeling. I will certainly be spending more energy on that area in the coming months & years but to me that is not passive income.
My Types Of Passive Income
My own passive income plans are currently based on investing in assets that will pay me a yield that will increase over time, specifically:
I will certainly be looking at many other options but one of my main goals is keeping things very simple. Adding real estate later on is attractive but as I will discuss, there are very good reasons for me to not currently include any direct real estate exposure. One of the main ones is that buying a house or even condo and then leasing it can generally work well but has risks involved both in terms of income (not being able to rent or having issues getting paid) but also time involved and concentration that make it unattractive to me.
Snowball Effect
Once that process has started it is hard to stop. Every month, you will have more and more income and while the increases will look tiny at first, compounding will do its job and as long as you stick to the process, you will have your own passive income portfolio.
How Much Do I Need?
While I have high goals such as reaching FatFIRE, I am a firm believer that basically every single dollar generated in passive income eventually helps my quality of life. How? Because as my passive income increases, I become less dependent on more traditional income such as my job’s wage. Because of the snowball effect, I strongly believe that once you reach a certain level, gravity helps that passive income increase exponentially.