Passive income is a must because you may tire but your money will never retire. – Jugdish Ahuja
There is no security in a job, even a high paying one. Be smart and don’t rely on just one source of income. – Ray Higdon
If you don’t find a way to make money while you sleep, you will work until you die. – Warren Buffett
Rich people choose to get paid based on results. Poor people choose to get paid based on time. – T. Harv Eker
The preceding quotes encapsulate in a few words the problem with relying on just your job for income and why you need to seek additional income sources if you want to avoid the fate of the Octogenarian McDonald’s worker.
Here are the biggest problems I can think of with relying solely on your job for income:
- There’s a ceiling to how much you can make. There are only so many hours in the day.
- What if you get hurt and can’t work anymore?
- One day you won’t be able to work anymore.
- You’ll always be trading time for money.
There are 168 hours in a week. If you work nine to five, you’re spending 40 hours of each week working, but I know very few people who only work 8 hour days.
Most of my professional friends are working 10, 12, 14 hour days. For the nine to fiver, that leaves 128 hours a week not being used to produce income. The reality is, that the remaining 128 hours are being used to spend the money you made during the other 40 hours – on food, utilities, entertainment, etc.
So when people hear they need to come up with additional streams of income to achieve financial freedom, they assume it means getting another job. You may increase your income in the short-term, but I just see that as a path to early death or retirement from working yourself into the ground.
When millionaires like Warren Buffett and T. Harv Eker talk about creating additional sources of income, they’re not talking about taking on another job – another source of active income. They’re talking about passive income – the type of income that makes you money all 128 hours of the week.
Active income – your job – is trading time for money.
You put in the time, you get paid an hourly wage or a salary. You work for active income. Passive income, on the other hand, works for you.
When people think of passive income streams, they think of the typical fixed income financial products. Those make money in your sleep, right? I’m gonna argue that most of these passive fixed income products don’t make you money in your sleep but rob you.
Here’s a list of the usual fixed income passive income culprits:
- Bonds (U.S. Treasuries and Corporate Bonds).
- Savings Accounts.
- Money Market Account.
Now compare the rates of returns of these various products:
Now let’s see how these products stack up when you throw inflation into the mix.
$100k starting investment
3.22% Inflation (20-year average)
When factoring in inflation; bonds, annuities, money market accounts, CDs, and savings accounts all rob you while you’re sleeping. You may have a bigger number in your account in 20 years but when factoring in inflation, you’re losing money from these investments.
Passive Income Streams That Work.
The rich aren’t talking about the typical fixed income products when they’re talking about creating a passive income stream or multiple income streams.
What are they talking about?
Well, if the investing habits of the rich are any indication, the answer is alternative investments – and not just any alternative investments, they’re talking about cash flowing investments that grow overtime on top of generating near-term income.
Sophisticated investors like university endowments, family offices, and ultra-high-net-worth investors (“UHNWIs”) allocate nearly 30% of their investable assets in real estate. When combined with income-producing private equity, these sophisticated investors allocate more than 50% of their investable assets in those two asset classes – achieving returns over 11% annually.
Call me crazy, but doesn’t an 11% annual return sound better than 2.45%? Sophisticated investors not only inflation-proof their income, but they recession-proof it as well by investing in alternative investments in the private markets uncorrelated to Wall Street and the broader markets.
So what does a $100,000 investment paying 11% annually return me in 20 years?
Even with inflation, what is that total, and what is my net gain in today’s dollars?
That’s a net gain of $272,485.36. Now imagine re-investing your gains to create 3 or 4 additional streams of similar passive income. You can see the value of passive income now.
Nobody wants to work until they die. Most people would rather work on their golf swing while getting paid. This is possible through passive income.
Passive – as the name implies – means hands-off. Investing in commercial real estate and private equity doesn’t mean owning properties or running businesses directly. It means investing in private companies that invest in these assets and letting someone else worry about the day-to-day headaches.
Remember, if you’re trading time for money, you are not passively investing. You’re generating active income and that money will stop when you stop working.
So, if you want to achieve true financial freedom, turn your back on active income and run towards passive income streams.