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Passive Income will lead to Financial Independence


Passive Income Will Lead to Financial IndependenceFinancial 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

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.

Passive Income

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
  • Clothing
  • Car Insurance, gasoline, and other transportation bills
  • Pet food and veterinarian bills
  • Travel fund
  • Medical prescription, health insurance and other health care bills
  • Food
  • Property tax
  • Mortgage

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.


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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

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.

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{ 44 comments… add one }
  • John April 3, 2012, 10:05 am

    You mentioned Google AdSense, and I clicked on the link to view your check from AdSense . . . for those of you out there who don’t believe this type of passive income is real . . . I’ve seen the same type of check before from sales on my website. It’s real.

    I think it’s important to remember that acheiving any level of passive income takes a lot of hard work up front. So at first, it’s not really passive, but eventually it becomes so. 🙂

    • retirebyforty April 3, 2012, 3:29 pm

      That’s encouraging to hear. My media.net income is getting better so I’m happy with that.

  • Roshawn @ Watson Inc April 3, 2012, 8:03 am

    That coffee number is insane! I think too many of us neglect some of the methods of generating passive and portfolio income. Yes, we’re mostly aware of the major ways but sometimes forget that we hold all sorts of knowledge that can otherwise be successfully leveraged into additional income.

    • retirebyforty April 3, 2012, 3:28 pm

      Is it still passive income? I think you are talking about additional earned income right?

  • RichUncle EL April 3, 2012, 6:56 am


    I must admit I have been thinking of how to really get some passive income going in my life. I have some dividends and interest coming in but its all being reinvested into more stocks, so I do not consider it as part of my cash flow. I have a blog but I am in the begining stages and do not have adsense ads, only a few amazon links. Real estate is a dream for me, but not yet ready for that scenario. Kind of in limbo as to where to get some passive income. Good post.

    • retirebyforty April 3, 2012, 3:26 pm

      Keep at it. An easy intro to rental investing is to move and rent out your previous home. I think many investors started out that way. What do you think about P2P lending? You can start off small there too.

  • Invest It Wisely April 2, 2012, 2:39 pm

    $1,400 a month in passive income is great! I also like the idea of calculating “rat race” numbers to see what one needs in order to cover a given expense.

    • retirebyforty April 2, 2012, 10:50 pm

      Thanks Kevin. $1,400 is ok, more would be better. 🙂

  • Gfrom india March 31, 2012, 3:27 am

    My objective is to build on rental properties to rent out . They’re a hedge against inflation as rentals rise over time plus the value of the property increases over time. My objective is to earn $4000 monthly.I believe in Zero debt and a stress free life.
    I am working at present and save 50 % of what i earn .I am conservative and prefer to save in a stable & safe bank . I invest about 10 % of my savings in mutual funds. I dont do stocks.I run my own business which over the years has earned goodwill over the years . I dont plan to close it down entirely but will employ a manager to look after the business. I plan to partially retire and take up photography ( my passion ) with the time i earn by 2014. ( So long as God is by my side 🙂 Im 40 , Any advice?

    • John Pianezze December 14, 2012, 4:13 pm

      invest 80% of your savings in mutual funds. The bank is ‘safe’ but a bit TOO SAFE if you want financial independence. Current bank rates are lower than the rate of inflation, so you are steadily losing everything you save.

      • retirebyforty December 14, 2012, 11:04 pm

        I agree, people under 65 should keep an emergency fund and perhaps 5% of their net worth in cash.

  • youngandthrifty March 30, 2012, 11:44 pm

    I love the idea of passive income and to me, I think the best are dividends and rental properties.

    This idea of niche website sounds good too but it sounds like a lot of work.

  • Miss T @ Prairie Eco-Thrifter March 29, 2012, 12:05 pm

    This sounds like a pretty solid strategy. I would really like to get into real estate and rental properties but we aren’t quite ready yet financially. I am hoping that in the next year or two though we will be.

  • 101 Centavos March 29, 2012, 2:49 am

    Vending machines or a like business shouldn’t be discounted. I knew a gal in college that paid a portion of her tuition/book bills with a vending machine route. Another fellow I met was a stay-at-home dad for a few years with a similar set-up. After five years and the kids in school, he went back to work as an engineer.

  • CultOfMoney March 28, 2012, 8:43 pm

    I also think that picking a particular bill to get paid with your passive income is a great motivator. I like that a lot. At this point, my passive income is mostly in P2P lending and the stock market. I’d like to get a bit more diversified in that respect.

    • retirebyforty March 28, 2012, 9:13 pm

      It’s not easy to generate passive income. The rental properties have a big hump, but I’m sure you can get into it.
      I need to find other sources of passive income as well.

  • jefferson March 28, 2012, 6:38 pm

    i am brainstorming a ton of ideas for passive income at the moment, and i love the idea of picking a bill to get covered by PI.

    i think i will start with coffee.. since it is the most attainable!

    • retirebyforty March 28, 2012, 9:13 pm

      Good luck! I’m sure you can do it.

  • Kurt @ Money Counselor March 28, 2012, 1:16 pm

    I like this way of thinking about passive and active income and paying bills and working toward financial freedom. I’m thinking of adopt it in my own life, with attribution, of course, in case my wife doesn’t like it so much :-).

    • retirebyforty March 28, 2012, 9:12 pm

      I’m sure you can convince your wife. Just keep working on it a little bit at a time. 😉

  • Jeff @ Sustainable Life Blog March 28, 2012, 12:44 pm

    That’s a healthy passive income stream joe! that is awesome!

    • retirebyforty March 28, 2012, 9:11 pm

      Thanks! I’ll keep working on it.

  • krantcents March 28, 2012, 12:28 pm

    I believe in multiple income streams, sme may be passive others acive. I like to stick to a plan so I know if I reached my goal or not. I am still working on additional sources of income and then I will work on how much I will need or want.

    • retirebyforty March 28, 2012, 9:11 pm

      It’s important to diversify our income sources these days. We can’t depend on our day job anymore.

  • MoneySmartGuides March 28, 2012, 10:07 am

    I have been working on building my passive income to the point where I can live off of it. I am not even close to attaining this yet, but like how you break it down to pay one bill each month with your passive income. I like breaking it into smaller, more attainable goals. Looking at the large monthly number can be intimidating. But paying one small bill each month and working towards paying a second one each month is motivating.

    • retirebyforty March 28, 2012, 9:10 pm

      I think starting small is good because it will get you rolling. 😉

  • Modest Money March 28, 2012, 10:02 am

    I’d like to shoot down the one thing you mentioned as passive income: online properties. In the past you used to be able to just put up a basic website and watch the money come in. These days though search engines are fighting back against those made-for-adsense type websites. It’s not really a feasible option anymore. Now to get income from a website it really needs to be a quality website, ideally with regular updates. Still, in many cases, most of the intensive work is done in the first few months. So I guess it still is semi-passive a lot of the time. I do still get income from my websites that I made years ago, but I know that is bound to taper off.

    • retirebyforty March 28, 2012, 9:09 pm

      That’s too bad. I thought the niche sites are still making money. Google will keep tweaking their algorithm…

      • Modest Money April 4, 2012, 9:28 am

        It depends on the setup. I think they were specifically targeting the ones whose main goal is to send traffic to another website, which is true for most affiliate sites. You can still make good money with a niche site, but it has to fulfill a need on its own.

  • Dollar D @ The Dollar Disciple March 28, 2012, 8:45 am

    Of the two approaches: giant nest egg or passive income, the second approach is definitely easier AND can be accomplished much earlier, like at age 40 🙂

    • retirebyforty March 28, 2012, 9:08 pm

      The problem with giant nest egg is that it’s not realistic for many people. Of course I would love to have 2 million dollars in the nest egg, but it will take my whole life to accumulate that.

  • Little House March 28, 2012, 7:00 am

    I really like this strategy. I’ve been slowly building up my passive income sources, but really need to branch out. P2P lending is a very interesting concept to me. I need to look into this one. 😉

    • retirebyforty March 28, 2012, 9:07 pm

      See if they are allowed in your state. P2P has been good in the short term, but I think we’ll have to see how it goes in the long term.

  • Marianne March 28, 2012, 5:13 am

    We are hoping to be able to buy an income property in a few years. We’ve talked a bit about vending machines but not too seriously. We hadn’t even thought about a laundromat… Currently, we have a small bit of passive income that we keep in an account to fund other passive income opportunities. A good deal on some coins from the mint came up a couple of months ago and because we had this slush fund my husband could just go ahead and take advantage of the deal and he will make a good profit on the coins. Even without the slush fund we could have taken money from another area in our budget but with it, we don’t have to argue about it or anything if one of us thinks it’s a good idea or not. That money is there to make more money.

    • retirebyforty March 28, 2012, 9:05 pm

      It’s a great time to buy rental properties. I think the market is improving and the great deals are more rare now though.
      I’ll have to learn how to make money from the mint. I heard a few things about it, but don’t really know the details.

  • First gen American March 28, 2012, 5:09 am

    I am thinking more and more about real estate again. I think this is definitely the time to dabble in side ventures. It hit me when I started house hunting and the homes at the top of my pricerange were all self employed people…and these guys werent surgeons. They were plumbers, glass cutters and other tradesmen.

    • retirebyforty March 28, 2012, 9:03 pm

      Being a successful business owner is much more lucrative than working for others. You get to keep all the profits, but I guess there are a lot of risks too. Hope you find a house soon.

  • Matt March 28, 2012, 4:55 am

    How much do you have invested to generate the $1400?

  • Another Reader March 28, 2012, 4:16 am

    You are largely living on your wife’s paycheck. You have passive income of $1,400 plus net earned income from your job. If you worked at your job another, say, three years after 40, how much more “passive” income do you think you could generate if you invested all of your earned and passive income in that time? Could you pay off one or more of the rental properties by then and generate more net income that way? Could you pay off the house and significantly reduce your expenses? Could you invest enough in your 401(k) to double your potential retirement income at 60?

    In your shoes, I would stop focusing on the exact date of retirement and instead focus on what financial goals I need to achieve to retire. I want to be secure in my retirement so my goals would be to replace most of my net income and have cash savings to cover two years of living expenses plus several major capital improvements to the real estate. Only then would I write my letter of resignation.

    • retirebyforty March 28, 2012, 9:17 pm

      Thanks for your input.
      I have largely achieved my financial goals at this point.
      It would be nice to have more cushions, we’ll see.

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