Passive Income
Technically speaking, passive income is income that is created through little to no effort. There is an on going argument amongst people as to when the line is crossed from passive income to part time gig or side hustle. In my opinion, how you classify your income is up to you, what is really important is your definition of financial freedom and does your “version” of passive income help you to achieve your goals.
Passive Income
On the Cash Flow page it is very clear that our goal is to reach a state of positive cash flow, where your income is greater than your expenses. Depending on your situation, you should use this positive cash flow to create an emergency fund, pay down debt, or to ultimately acquire income producing assets. Your income producing assets is where your passive income will be generated. What kind of income producing assets that you purchase is completely up to you and is determined by just how passive of an investment you want, what kind of risks you are willing to take, and what you find interesting.
Implementing a positive cash flow strategy in your personal household is the most difficult step to complete on your journey to escape rat race prison. The sacrifices and life style changes are tough to make but the concept is pretty simple… spend less than you earn. The next step, which is creating passive income by purchasing income producing assets is much more difficult to master. There are literally thousands of ways to invest your money and as stated before you need to decide what is best for you.
Some very basic concepts that you need to understand are, for the most part, the lower the risk, the lower your return. This is important to you because it will directly impact the speed at which you can grow your newly acquired passive income. Just like the downward spiraling circle of doom that debt can create, there is an opposite uplifting effect that passive income can have on your finances.
For simplicity sake, lets assume that you can create a positive cash flow of $10,000 in a year. You decide to invest your $10,000 into a certificate of deposit (CD) with your local bank. You earn an annual return of 2.5% on your CD, which is $250. Now lets take the same $10,000 and loan it to a real estate investor who specializes in flipping houses. The flipper promises to double your money once the project is finished and the house sells. He accomplishes the goal and gives you $20,000 in a years time. You just made an annualized return of 100%. If you could double your money every year, you would reach financial freedom in no time. However, if the house burnt to the ground and the flipper did not have insurance, you would lose everything.
Typically
High Risk = High Reward
Low Risk = Low Reward
I advise that you constantly educate yourself on the best income producing asset that fits your needs in both your risk tolerance and financial goals. This part of our journey to escape rat race prison never ends if done properly.
Year 1
Positive Cash Flow (CF)
Year 2
CF + Passive Income (PI)
Year 3
CF + PI + PI
Year 4
CF + PI + PI + PI
Year 5
CF + PI + PI + PI + PI
Year 6
Financial Freedom!!!!
You get the idea… it will start slow but over time it can continue to grow. Buy and expand your income producing assets, rinse and repeat, rinse and repeat.
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