Financial Independence via Passive Income
What is Financial Independence? It’s simply a state where you don’t have to work anymore if you choose not to AND you can still take care of the bills. How does one get to this Financial Independence utopia? Especially since most of us work for 30+ years and still have a difficult time funding our retirement.
Being Frugal is the first step toward financial independence. It doesn’t mean you have to eat rice and beans every day. To me, it’s just spending way less than you make. If you make $200,000+ per year, then by all means, spend some money on sushi and beeru. If you manage to save 50% of your income, I think that is a great start to being Financially Independent. Yes, it is easier if you make more money, that’s just life.
Being frugal and saving money is only the first step to Financial Independence. You will have to figure out a way to generate income without working. That is the 2nd and more difficult step. Some people have talent and can create music, books, or other products that generate royalties. I think that’s a great way to go if you can do it. For the rest of us, we have to invest our savings in income-generating investments that require minimal active participation. If you have to go to Hawaii for two weeks to work on your tan, these passive investments should be able to run themselves. Here are some ways to generate passive income.
- Stocks. A dividend stock portfolio is a great way to generate some predictable income. Growth stocks can also generate income through appreciation, but you need to keep an eye on it more.
- Bonds, CDs, and other interest bearing accounts are a great way to generate passive income. The rates are dismal now, but at some point, we’ll see 5% yields again.
- Rental Properties can be passive or active income. It depends on what you choose to do. If you actively manage your properties, then you’ll make a lot more money, but that is not passive anymore.
- P2P and other types of lending. This could be risky, but I’m lending through prosper.com and seem to be doing okay so far. Only time will tell. My dad lends to other businessmen in Thailand with the interest rate of 5% a month. Now that is the way to go.
- Online properties. Some people have seen success by generating niche (minimal to no updates) websites and putting up Google’s Adsense. Once the domain and server fees are covered, the rest is gravy.
- Pensions are also passive income. If your job offers a pension, then by all means, work until you are eligible.
- Self sustaining businesses? Vending machines or laundromats with a trustworthy manager?
Use Passive Income to pay your bills
It’s not easy to build up enough passive income to pay your bills, and here is a challenge for our readers. Why don’t you pick one expense and see if you can generate enough passive income to cover it.
Here are some other bills that you can choose from
- Coffee. Can you believe the average American worker spends over $1,000/year on coffee?
- Internet connection and other communication bills
- Electric, water, trash, sewer, and other utilities
- Car Insurance, gasoline, and other transportation bills
- Pet food and veterinarian bills
- Travel fund
- Medical prescription, health insurance and other health care bills
- Property tax
You can see that it starts off easy, but gets more and more difficult as you go down the list. It is quite difficult to generate enough passive income to pay the mortgage. Currently, I’m making about $1,400/month in passive income and can use it to pay many of these recurring bills, but not all of them. You can do it too by starting small and keep working at it. Before buying your next pair of shoes, see if your passive income will cover it. This will put the frugal into your spending habit. 😉
Your passive income will outlast your earned income because you can’t work forever. Strive to pay your bills with passive income and you will reach Financial Independence much faster than the average worker bee. Once you get there, you will have the freedom to keep working or find some other ways to spend your valuable and limited time.
Here is the final takeaway – use passive income to pay bills and invest your earned income.
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.