Statistically, millionaires tend to have at least seven streams of income. Generally, income is divided into two categories: passive and active. You earn active income when you work, that is, per the hour, per month, etc. If you do not work, you do not get paid. Passive income is earned repeatedly for a single action or investment. It is not related to you working actively. You still need to work for passive income, but the payment is not tied directly to the number of hours you work. Accumulating wealth is not that difficult. Here is what you must do:
- Sell your time and earn money.
- Make sure your expenses are less than your income.
- Invest what you save so it grows.
The only problem here is the Maslow’s Hierarchy of Needs. You need a house, food, and other basic needs which cost money. In a perfect world, it would be easy to use money from your day job to build a huge successful business. The reality is, that money goes to accommodation, food, and clothes.
Subject to Financial Gravity
Assume that your net worth is an airplane. Your goal is to make it airborne and soar high. Your expenses determine the size and weight of your plane. The heavier the plane, the harder it is to fly it. Only when your income (thrust) exceeds your expenses (gravity) will you be able to take off.
Begin with Active and Build Passive
Use what you have for now—active income from your job—and save enough to create a passive income stream. On matters saving, there are two concepts: Earn more: focus on making more money either through side hustles or businesses.
Save more: cut your expenses and live frugally. Ideally, do both. When you cut expenses, your disposable income increases immediately. On the other hand, earning more is a long-term thing. Save as much as possible, this cannot be emphasized enough. You can either build your own business using your savings and reap from that or you can lend someone else your savings. They will use the money to build something valuable and pay you back for your money. As you build your business, you will have to give up active income and work for free, initially, before it becomes profitable. Think of it as volunteering at your business. In future you will reap both passive and active income. While you are doing this, your expenses will still need to be paid. This means that your business will either be a side hustle for a while, or you will be relying on your savings. When you lend out the money, someone else will be doing the heavy lifting.
Common Streams of Passive Income
- Interest from various loans
- Dividends from partnerships or investments
- Capital gains from selling investments
- Royalties from licensing or selling products
- Rental income from you real estate property
- Business income
Passive income is becoming more popular by the day. However, many people still do not understand how beneficial it is. Believe it or not, making money in your sleep is not the biggest benefit. The conclusion outlines more important reasons why everyone should seek a passive income stream or be in the process of creating one.
You Will Have a Reliable Retirement Life
Planning for retirement should not be a huge headache—unless you think that you can only prepare for retirement by saving. If a sudden change in your life or the economy happens, your savings may not be very helpful in retirement. It is no secret that savings are just not enough. You will have unexpected expenses especially in your old age and you are likely to underestimate the amount you should save. People are living longer nowadays but that should not mean they want to work more years. A passive income stream means that you will have constant cash flow. You will be getting an amount of money regularly, unlike with savings. It will be like getting a paycheck without actively working.
Many Passive Income Streams Are Taxed at a Lower Rate
Wealthy people know that some income types are not taxed at the same rate—that is why they do not appear to be burdened by taxes. Active income, in most parts of the world, is taxed very highly. Again, you cannot defer active income tax, something that you can do with passive income tax.
You Can Create and Accumulate Wealth Easily
When first nurturing a passive income stream, you may use a lot of effort and time. After that, you can relax and watch money flow in. The point is that a time will come when you will not have to do much, but you will still enjoy cash flow. Soon enough, you will be able to create another passive income stream.
Passive Income Will Increase Your Standards of Living
This is in the sense of better relationships and better health. Modern lives commonly lack physical, mental and emotional health. Meaningful friendships and relationships are becoming harder to make with each new generation. When you spend too much energy and time on your day job, you are forced to spend less of that in other areas. You can barely afford to get enough sleep, make a healthy meal or hit the gym. At the end of the day, you are mentally stressed. However, you can do nothing about it because you must pay bills and you probably have people depending on you. Most people don’t have the energy and time to take care of other aspects of their lives. Passive income improves your standards of living in that, you will have extra energy and time to spend on other areas. You do not need to rely on direct income for a living. The four reasons outlined above should be enough to convince you to create passive income.
Time Is Money: Financial Independence Retire Early