Active income is like a drug. You get the immediate, or almost immediate, results and even though it’s on a pay-as-you-go basis, it’s addictive. You get more money and you get it fast. Passive income is a different story.
Passive income is a long term strategy. You don’t make as much, at least in the beginning, but over time you make a lot more money. That’s because the money keeps showing up even if you’re not working very much.
In general, if you’re just getting started with your own business and investments, you need both. You need to build passive income but meanwhile, you need a way to put food on the table so you need active income as well. Just remember to not get swayed by the siren’s song of active income. Sure you make money, probably more funny, and definitely faster. But if you stop working, the money stops.
The same short term/long term issue happens with how you fulfill on your business promises. You can be the guy who does all the work, who makes the sales, fulfills the order, does the bookkeeping and basically everything. Keep it small and keep it all.
The key word is “small.” If you’re the do-it-yourselfer, you can know that you’ll never be responsible for someone else’s screw up. You can control the costs. But you have to show up to get paid. And you never can grow your gross income or net income, past a certain point.
You can create passive income with your business if you’re willing to let go of things you’re not great out. You need a system, good employees and sub-contractors and quality control. Those may be new skills for you to learn, but if you are willing to add them to your repertoire, you’ll build a business that creates passive income.
In 2008, Richard and I hit our bottom financially. The real estate bust had hit us hard, we had a business blow up with a bad partnership and I had let go of my core business (CPA tax and accounting practice) to pursue other businesses. In other words, we were left high and dry. We had to start over, but this time we wanted to do it the smart way, with a conscious decision to create both active and passive, and a way to gracefully exit the active income when we were ready.
Twenty months later, on August 22, 2010, we hit financial freedom. Our passive income covered our expenses. In fact, our passive income was almost three times as much as our month expenses! It was interesting how in one month we jumped into financial freedom with such a big number. We’re now at 5 or 6 times our monthly expenses and I still do some active work, just because it keeps me current and fresh with real life client tax and accounting issues and strategies.
As I see it, there are four key strategies for creating passive income:
- Real estate passive income. You’ll need to invest a lot of time or money to buy the properties and generally the passive stream is low in relationship to that investment. If you flip properties, that’s active income, and will be higher income.
- Business passive income. If you have an existing business, chances are you can change your systems to create more leveraged income or even passive income. You’ll have to learn some new skills and let go of some of your current everyday actions. It won’t be easy, but you’ll likely find that you can create even more passive income then you do with your real estate.
- Join an MLM. If you’ve never considered an MLM before, maybe now is the time. Or if you joined one and quit, maybe it’s time to give it a second chance. The benefit of an MLM is that you don’t have to figure pricing, source the products, spend hundreds of thousands of dollars on prototypes and inventory and build an infrastructure. All you have to do is sell. No matter what business you have, you’ll have to sell, so it’s not one more thing, it’s a whole bunch of less things. If you’re ready to look at an MLM with fresh eyes, drop me a note. I can tell you why, after 30 years of working with industry leaders, I chose the MLM I did.
- Paper investing. If you have the cash, without a doubt the easiest way to invest is with interest and dividend returns. If you’ve ever played the game Cash Flow 101, you know that an easy way to win is to simply get enough money that you then invest in secure bonds. It’s the easiest, safest, lowest work way to get passive income.
Which way will you choose?