Confidential: You Need Passive Income to Get Rich

August 3, 2017 — 8 Comments

According to my 21 year old self, I was going to be a multi-millionaire at my current geriatric age of 35. Sure, this was the same 21 year old who was doing death rides in shopping carts, throwing watermelons off of apartment balconies and drinking too many Natty lites*… so I don’t really care if he’s judging me now!

I didn’t have a plan then, I only had hope. Hope won’t make you rich, but I have learned what will – something much more exciting than watermelon tossing – passive income!

What I’ve learned is most of us can’t become rich off of our salaries alone due to two reasons:

  1. Lifestyle Inflation: spending will increase to consume full income no matter how much one makes
  2. Salary growth (or lack there of): our salaries won’t grow fast or high enough on our own to make us rich

We live in a system that uses our emotions against us to drive us in a direction that’s not to our advantage. You were more than comfortable in your sweet 1993 Chevy Lumina with maroon interior and cheap Ikea furniture when you graduated college and got your first job, but it’d be an utter embarrassment if you still had the same dull trophies one full year after that, right?? I sure thought so, and I let lifestyle inflation dictate a very small savings or investing rate.**

As for the salary growth, unless you’re able to pull in a huuuggeee income from doing things like being a dirty politician or packaging bad car loans into debt instruments to leverage against and sell to Wall Street banks, you’re going to need some additional assistance to get rich. This might seem dire, but there is hope.

Hello lack of hope, meet Passive Income

Passive income is money you get through automatic channels you’ve previously set up that require very little effort from you. They’re sweet, but they take some time to get going because usually it is returns you make off of your own money. Other people define passive income more loosely like selling a book you wrote on Amazon or selling handmade leather bracelets on Etsy, but those don’t sound passive to me because they require a lot of work and I’m not good at leather working***.

Let’s review the more common types of passive income:

  1. Investing
  2. Real Estate
  3. Building a network of drug dealers
  4. Pimping
  5. Rodan and Fields

1. Investing

I’ve been investing since I was 14 when I bought some gold coins that I would later sell to purchase my first truck. My first stock investments came in the biotech and dot com bubble in 1999-2000 when my dad let me throw in some money to his account as we played the market. It was amazingly fun when our portfolio was going up 10% a day, but when it all came crashing down it took my dreams of my first million before high school with it. I could’ve worn a class ring on every finger and had my own harem of cheerleaders.

My next investments came after college with my first company-provided 401k and an eTrade account with a few hundred dollars of “play money”. It started building up very slowly after a few years to five figures (probably less than $11k) and this is when I realized I would need to make the returns come faster if I ever wanted to be rich. Forgetting my earlier lesson of getting burned in the market, I started playing with futures, options and penny stocks and once again lost most of it. If anyone tells you to day trade or start playing with those dangerous asset classes to get rich, run.

It took me quite a few years to finally realize what investing was all about. Small additions of money invested consistently over the long term in a safe, diversified portfolio. No get rich quick schemes, no day-trading and no pyramid schemes. As you progress in your career, you’ll need to continue bumping up your dollar contributions to really see your nest egg grow and you’ll start to experience compound interest, which Einstein called “the eighth wonder of the world”.

Compound interest happens when your money has babies of its own, and eventually those babies start to have babies. Obviously, the more money you have, the stronger and faster the effects of compound interest. Once your nest egg starts growing big enough, you’ll see passive income really kicking in as your stocks start throwing off dividend payments. Also, unless you’re wasting all of your money on penny stocks, you should see some major gains in the values of the stocks which you can eventually sell for a profit… yielding more passive income.

2. Real Estate

We jumped into the real estate game when we rented our house out in Dallas after fixing up the ‘ol Airstream and traveling North America. We’re lucky to clear over $1,000 a month on our mortgage, so we’re creating a positive passive income. We may lose this stream of passive income when we’re done traveling, but for now it works.

I don’t have too much experience with real estate yet, so I’m not going to BS you, but it’s definitely a secondary passive income stream I want to develop. My goal would be to start acquiring some properties using the 1% rule (gross income should be greater than 1% of the house value) and see if I like it.

The problem is you still need your salary to have enough money to invest in the beginning.

Even when we were both working last year, there were days when the stock market movements would make or lose more money in a day than we made from work! That’s when passive income starts getting exciting… especially when we’re in the middle of a bull market like the one we’re in now. However, obviously, you gotta have some money before you can start buildling these passive income streams.

You need to do all of the dirty little things like budget, sell stuff on Facebook, live off of one income (if your family has two), put the kids to work, make sure the pets pull their own weight and work more. You have to be serious about this for a long time before your money can start making money. You’ll have set backs along the way like a big drop in the stock market, but as long as you’re still investing, that’s a good thing, because you’re able to buy stocks for cheaper.

This is how getting rich will work for the majority of people. Sure, there are phenoms like Mark Zuckerburg who invent an entirely new industry and make billions (maybe this is what my 21 year old self planned to do), but for the majority of us, it’s nose to the grindstone… or better yet, budget to the grindstone.

 

*Don’t judge me, it was in college… and those particular memories were from the summer when I stayed in Stillwater and co-directed a summer camp

**I think it was actually a negative savings rate

***You’d think I could learn while living in a camper for a year, but much like “learning to play the guitar”, my lack of artistic ability may always prevent me from being a proper hippy

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8 responses to Confidential: You Need Passive Income to Get Rich

  1. What’s definition of Rich and today’s middle class? Is 1 million in 5 years even enough to live “comfortably”

    • Hi Ashish – I’ll go with our consulting answer, it depends! I’d say it’s enough money to live a lifestyle you want to live without needing to work. To get to this number, I use the 4% rule (you can comfortably live off of 4% of your net worth/investments). So, if you have a million, that’s $40k per year – with major tax advantages because you can basically not pay taxes and use the full $40k on life spending. However, many people may not be willing to live within the financial limits that requires, so they might need more like $5 million which would give you $200k/year! What’s your definition of rich?

  2. I thought for sure that watermelon tossing would be the next Olympic event! All those wasted years practicing for nothing…

  3. I’ve been reading your posts for a little while now and only recently realized you used to work at Accenture (where I work) and today learned you have a home in Dallas (where I live). Not to mention you live in an Airstream (which my husband and I are hoping to buy in the next few months). I knew I liked your posts from the moment I started reading them before I realized we had a few things in common. Love how you’ve grabbed your life by the horns and followed what feels right to you for your (semi-retired) career. Keep the great tips and lessons learned coming!

    • Hi Karla – that’s so crazy!! They always say Accenture is good at hiring the same types of people – I guess this proves it 😄

      Thanks for the kind words, they mean a lot to me. Let me know if you have any questions or suggestions as you progress!

  4. I do love your advise. Passive income is indeed a suggestion all you need heed. 😊

  5. Thanks for your thoughts on passive income. I too, am still trying to figure it out. Except I’m a lot older and have kids. I was intrigued by your 1% rule. Can you explain it a little more in detail?

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