If you want to quit the daily grind once and for all, you’ll need to create streams of passive income. Once you have enough income coming for these sources to fund your lifestyle, you can say goodbye to mandatory work.
Now, what do we mean by mandatory work? Well, every workday you probably have a job or business to attend, whether you like it or not, otherwise you won’t have money to pay the bills. Without money to pay the bills, you soon wouldn’t be able to keep your lifestyle and your life could be turned upside down. That’s why we refer to it as mandatory work.
Of course, if you like your job, you might not feel that is a mandatory endeavor, even if you live a life from paycheck to paycheck. Showing up to work everyday might give you sense of purpose. But, what if you were to remove the money equation and your job was optional, would you still show up to work every day?
By building enough passive income streams to sustain your lifestyle, you have the option to choose what you do, when you do it and who you do it with. That’s when you reach financial independence. FI gives you the ability to fully experience life because you get to dismiss, what I perceive as being the root of all evil, the lack of money.
Having a job as the only source of income can be stressful
Depending on a job can be a stressful endeavor. You’re subject to doing whatever The Man requests with very little leeway. You’re not in a good position of strength to demand better hours, higher pay, or work flexibility. The great news is that it doesn’t have to always be that way. You can build income streams that will earn you money while you sleep and give you the power to work on your own terms.By building enough passive income streams to sustain your lifestyle, you have options! Click To Tweet
It takes money to make money and, unless you inherited wealth from rich folks, you’ll need the seeds to create passive income streams, which are initially earned through a job or self-employment. This type of income is defined as active income.
Most of the population earns their money via active income and never truly discover the wonders of passive income streams. Also, some passive income streams require a lot of work upfront. You could be working on a project for a while until money flows in. Not everyone has the discipline to stick through it until then. You need to have the right mindset to build passive income this way. The beauty of it is that you only have to work once to set it up and you can get paid beautifully over and over. Think royalties. You put the initial work to write a book or a song and then get paid indefinitely.
The downside of active income
- It’s unsustainable in the long run.
- Someone else owns part of your time.
- You can get sick and not be able to work anymore.
- You age and can’t perform physical work as you used to.
- Job might not be as exciting, 10-15 years down the road and you grow a dislike for Mondays.
- You don’t show up to work, you don’t get paid.
By the way, if you do hate your job, try to find another one that you can at least tolerate, and continue planting those seeds from your active income, until you no longer need to depend on your job. If you earn two bucks from a job, save one and invest it! That’s how you start building your passive income stream. It’s that simple!
The upside of passive income
The money that you make from investments is considered passive income. There are some great benefits to creating passive income:
- You own your time and can pursue things that you love.
- It comes on a regular basis.
- It takes little effort to maintain.
- You don’t need to show up to get paid.
- You don’t need to deal with job stress and uncertainty.
- It provides you with financial stability.
Getting a shitload of passive income is where you want to be, because no one ever says: “Those damn dividends keep showing up in my account every quarter without my permission!” To achieve financial independence and drop the mandatory work, passive income is the way to go! And there are many ways to generate passive income, it’s just a matter of preference.Passive income streams: you work once to set it up and can get paid beautifully over and over. Click To Tweet
Let’s say that you’re able to save $100 a month for the next 10 years and have it invested at a 7% annual rate of return, how much could you have at the end of that term? You’d have $17,368.48. That’s a possible return from a diversified portfolio of stocks and bonds.
That means you only had to work to earn $12,000 in active income (deposited in $100 monthly installments for 10 years) and you made $5,368.48 in passive income. That’s income you didn’t have to show up to a job for. However, if you don’t save, you’ll never have the extra $5k in your account, nada, nada, nada, nada, nada!
How money flows into your hands
Cash flows into your life in four different ways: through a job, a self employment gig, a business or an investment. Robert Kiyosaki does an excellent job explaining this in his book: The Cashflow Quadrant. Although I don’t agree with everything that Mr. Kiyosaki preaches, I’ve learned some valuable lessons from his books and the Cashflow Quadrant is a must read in personal finance.
How people earn active income
If you are employed:
You have a job in which you exchange your time for money. There’s only one little problem with this: if you can’t show up to work, you don’t get paid.
If you are self employed:
You work for yourself and have more control of your time, but have time constraints and usually can’t take long vacations (more than 2 weeks) since your business can’t run without you. Also, if you get sick and can’t get the work done, you don’t get paid.
How people earn passive income
If you are a business owner:
You have people working hard to generate income for you. You’ve succeeded at creating a system that makes money for you and you’re not a component of the system! You can spend extra time with your children without money worries, or you can go away and sip piña coladas for months, even years, without your business taking a hit. Just don’t allow your liver to take a hit.
If you are an investor:
Money works hard for you. You own the most passive forms of income. Hello, the Top 1 Percent club! You can spend time planning your next exciting family gathering instead of your next boring business presentation. You’re truly making money Enchumbao style!
On which quadrant of the cash flow do you want to be?
To create passive income streams you either need to own at least a business that provides you with the cash flow without an active participation from you, or become an investor (our preferred way). You need to be on the right quadrant of the equation. This is where you do your own numbers instead of the numbers doing you. The question is: on which side of the equation do you want to be and what are you doing to get there?
On which quadrants are we?
We currently work full-time jobs that are providing the seeds to fund our passive income streams. Every dollar that we save and invest means that we’re shifting from being employees (E Quadrant) to becoming investors (I Quadrant). As of March 2017, our passive income streams provide enough to cover all of our projected living expenses in early retirement. We have no interest in owning businesses because our investments, the I Quadrant, provides enough for us. Creating businesses (B Quadrant) is not going to bring us any more happiness, but rather be a distraction to spending our time as we choose. We are not saying that this is the right way, it’s just the right way for us.
What kind of passive income streams does the Enchumbao Household have?
- Index-based investments – We have a diversified investment strategy based mostly on index mutual funds and ETFs that brings us passive income in the forms of dividends and capital gains. We feel that the time commitment required to picking stocks is not a good investment of our time. We already own a piece of over 3,500 businesses via index funds and are happy with an annual average return of 8-10%, with no time commitment requirement whatsoever.
- Online savings accounts – We keep money in the bank for short-term goals, usually for goals with less than a 5-year timeframe. The interest is nothing to rave about, as it barely keeps up with inflation, but this is money that needs to be risk-free because it’s for short-term use.
- A rental property – We own a two-apartment rental property, which brings in monthly rental income, a nice annual ROI (return on investment) of 10%.
Don’t be afraid to make mistakes
Robert Kiyosaki also said in his book: “Remember that anything important can’t really be learned in the classroom. It must be learned by taking action, making mistakes, and then correcting them. That’s when wisdom sets in.” Don’t be afraid to make mistakes. Own up to them and learn from them.
Start building your first passive income streams and continue your journey, learning along the way. Silence that tiny voice inside of you that tells you it can’t be done. Build those FI soldiers, aka income streams, and you’ll be amazed at what they can do for you.
Passive income streams provide endless options and complete freedom
The options are endless when your money is working for you and doing all the heavy lifting. You can lead a life of travel, family time, hobbies, and volunteer work without having to ever show up to work again.
Notice that I emphasized early on in the post that you need to create enough passive income streams to sustain your lifestyle, not just to make money for the sake of having it. To us, money is a means to an end. It’s there to provide us freedom to use our time as we please. The minute you chase money for the sake of it, you enter a vicious cycle where more money doesn’t necessarily means more happiness. At some point, it starts to provide a diminishing return on your happiness.
Staying focused on your goals is key as you build your passive income streams. Save a dollar here, invest a dollar there, and pretty soon, you’re talking about some real money flowing from those streams. Building passive income streams is a favorite topic in the FI community, and we hope that, after paying any debt you may have, it becomes one of your favorites as well.