What is passive income and why should you care about it? You might be in your 20s and 30s with a good income, a nice car, maybe a house? Should you really care about passive income, retirement? You might also feel you don’t have time or money to waste on risky ventures such as buying stocks. However, there are dangers to not caring about this stuff now. If you don’t you will end up is a contious cycle or working to earn money to spend it and keep repeating that cycle until you can’t anymore.
At one point of your life you will need to break this viscious cycle and you might as well do is sooner rather than later. The power of passive income will give you options you never thought possible. While your co-workers are drudging through mountains of sh*t work into the late 50s and 60s you’ll be reaping the rewards of investing early. You’ll be sitting on a beach in the sun with a refreshing beer or coctail, kicking back and relaxing.
It all starts with some simple strategies. We can start to spin the loop from us working for money, to our money working for us. This article is going to show how to create your own money tree by using:
- Money to buy assets
- Assets to buy time.
Disclaimer: This article should not be considered as financial advice. You are responsible for your own financial research and decisions. When investing capital is at risk.
Andrew | Mr Money Side Up
What Is Passive Income?
Passive income is making money whilst you sleep. Passive income is money you earn that requires little to no effort on your part. Although you may have to put the effort in up front. Passive income gives you the freedom to do what you like, when you like and how you like it. This is because you don’t have to work to earn money once passive income covers your cost of living. Work becomes optional, so whilst you might want to work you have more freedom to pick and choose who and what you work for. This is called financial indpendence or if you do retire early because of your passive income financial-independence-retire-early (F.I.RE).There are different levels and early retirement strategies associated with passive income and FIRE. This includes but is not limited to:
- Barista FIRE – You have enough passive income to live a semi-retired lifestyle whilst working part-time. This is because this supplemental income bridges the gap between passive income and your expenses or live the lifestyle you want.
- Lean FIRE – Whilst you can retire early on lower amount of passive income to cover limited living expenses. This allows you to live a minimalist lifestyle during retirement.
- Fat FIRE – You are able to retire early due to a significant amount of passive income that far exceeds your expenses.
- Coast FIRE – The money that you have invested at an early age means that you don’t have to invest anymore. That’s because your investments will now grow to cover your lifestyle costs by your target retirement age.
Whilst F.I.R.E generally uses real estate or index funds, passive income creation can take many forms such as:
- Dividend stocks.
- Sales of a digital product on an online store.
- Sales of a material product through methods such as drop-shipping.
- Wbsite ad revenue or affiliate commission.
- Royalties from book sales.
- Recurring rent payment from rental property.
- Income from a real estate investment trust.
- Income from fixed or variable income funds.
Can You Get Rich Quick With Passive Income?
Unless you are a mastermind entrepenuer building up passive income requires patience, diligence and hard-work. It will test you psychological resilience, especially if you decide to invest in the stock market. Generally slow and steady wins the race when it comes to passive income and building wealth.However, the sooner you start and the more rapidly you focus on building these passive income streams, the easier it gets over time. Charlie Munger once said, “getting the first $100k is a b*tch, but once you cross that threshold, your savings begin to do the heavy lifting for you”.
Four Pillar Freedom explains why net worth goes crazy once you pass this threshold as a result of compound interest and investing in the stock market.
Compound interest starts pushing net worth higher at a faster and faster rate as each year passes.
What Is Passive Income From Real Estate?
There are actually about 6 ways of generating passive income from real estate and property.
- Rental properties (e.g. Buy to Let).
- Real-estate Investment Trust (REIT).
- House-hacking: e.g. buying a HMO and living in one and renting out the rest.
- Flipping Property: Buying at auction and renovating.
- Short Term Room Rentals: e.g. renting out a room in your existing property).
- . Real Estate Funds or Private Equity Funds – The mutual funds of real estate.
Real Estate Investment Trusts
For the purposes of simplicity and accessibility I’m going to focus on REITs. I am quite confident you will know how rental properties work to generate passive income, as you’ll probably have done this at some stage for your boomer landlord. You may also be reluctant to get hands-on with rental properties or having a stranger in your spare room.
An REIT is a portfolio of commercial real estate companies that own office buildings, retail spaces, apartments,and hotels. Shares of publicly-traded REITs can be purchased through regular funds from investment companies such as Fidelity or Vanguard. Just like stock portfolios these can be actively or passively managed by a portfolio manager. As the fund grows and performs well, you make passive income.
What Is Passive Income From Investing
By investing in a basket of index funds, you invest in a subsection of the economy. As the economy grows so does your wealth. Historically the stock market has grown about 10% on average each year. This is despite ever-present market volatility. As a result this allows people with a stock market portfolio to withdraw money from their fund at a sustainable rate.
There is some discussion around the exact percentage but most people are at a consensus that this is around 4%. Although some would argue is 1 or 2% higher and some 1% lower. This means that in order to generate passive income, you just need 25x the annual expenditure you would want to cover. For example, my rent is £695 a month (£8,340 per year), therefore I would need a portfolio of £208,500. This would generate enough passive income to cover my rent forever.
How Digital Entrepreneurs Creates Passive Income
Online entrepreneurs create digital assets that they can sell. This might take the form of physical products, expertise or recurring subscriptions. One a product has been created it can, in theory, be resold an unlimited amount of times. This might be something like a book, online course of other physical or digital products. Online entrepreneurs can also generate passive income through ad generating affiliate partnerships. This is done by attracting you to their digital spaces such as Youtube, TikTok, Instagram or their website. This is usually done with education or entertainment-based content.
The Wealthy Build And Buy Assets
Why You Should Build Mutiple Income Streams
The research shows that the 65% of millionaires have 3 income streams. These incomes were just like the ones mentioned above that create passive income. The faster you start to build mutiple streams of income you sooner you fast-track your wealth. Rather than buy assets and using the passive income to buy ‘things’ most people forever skip the assets stage and just buy stuff. This is the equivalent to a bad Monopoly strategy where instead of buying property you are content to pass go and get £200. This is how most people live their lives because of the lack of financial education in our schools etc.
In my opinion, the easiest method of building passive income is with an equally passive approach. That’s by investing in specific funds that buy a diversifed portfolio of stocks for you. Anyone can do it and you can start today. There are many reasons people never start investing. You might think it’s too complicated, time consuming or requires vast amounts of money to start. The reality is a very different and there are investing stategies you can follow with limited time and money.
You don’t have to be an expert stock picker or devote hours to complex analysis of individual stocks. You can simply learn the basics to investing and start a very simple path to wealth and passive income.
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