With the ongoing review of Rich Dad, Poor Dad and its focus on assets that generate cash flow, it seems like an appropriate time to look at passive income and ways to generate it.
What is passive income? Passive income is income from a source that doesn’t require any active work to generate income, though it may require a lot of work to get it started. For example, if you own a self-managed property that returns rental income to you, that’s passive income. If you write a book, then the royalties from that book are passive income. If you create a website, income from ads on that site are passive income. I view the archives of The Simple Dollar as passive income, for example, as I don’t actively edit or modify those pages.
What about income off of stock investments / mutual funds? These are referred to generally as portfolio income and, depending on who you ask, are either considered separate from or a subset of passive income. I view them as a subset, so I also include investments in equities as passive income, though I generally roll my income from these into more assets.
What’s the point? The point is that if you can accumulate enough passive income to match your primary income, it becomes your primary income. This is a way to gain freedom from being under the thumb of an employer.
Great! So how do I get started? The biggest thing you need to do to start building up your passive income is to start spending less than you’re bringing in. If you’re spending everything you make each month, there’s nothing left over to invest into earning passive income. This means you have to live somewhat frugally and also that you have to pay off your high-interest debts, as these merely drain money away from you at a frightening rate.
Once your finances are in better shape, start saving for and investing in assets that see some rate of return, such as rental properties or websites. This is often a mix of financial and time investment, though some are more weighted in one direction or another (property often requires more of a financial investment, while a successful website is more of a time investment).
When you’ve got an asset that can run on its own, then start saving for another, and another, and another, until you have enough passive so that you can cover your monthly expenses. At this point, you’re very close to leaving work, but keep at it until you can cover your monthly expenses and also invest a healthy amount of the income into more assets.
That’s expensive. How do I balance this with retirement? Remember, most retirement packages are passive income – they become an annuity that provides income without your effort when you retire.