This week I want to talk about Passive Income streams. One of my favourite things :).
It has been said that the rich have as many as 7 passive income streams…
What is a passive income stream? Simply put, passive income is income you derive without your direct participation. The most common types of passive income are derived from property investments, interest-bearing investments such as government bonds, term deposits, or bank interest, and corporate dividends from holding stocks or shares.
Let’s face it, not everyone can own their own business. We need people to work for companies to produce, provide and service those industries that we rely on for our daily existence.
Industry is what allows global economies to grow and generate wealth for their respective populations…
That, therefore, means that in the majority of cases, people will be deriving their primary source of income from paid employment, and there is nothing wrong with that.
The Household Experience
In most households, there will be more than one stream of income required to meet the ongoing expenses.
Compare that with the early 1900s when one income was sufficient.
The future is likely to require even more streams of income to meet the demands of the ever-changing environment that we live in.
The unfortunate fact of life in this day and age however is that paid employment is not going to make you wealthy on its own.
You have to supplement your ‘wage’ with other sources of income to become truly wealthy. And that is where passive income streams come into the equation.
It is very difficult to become financially free without passive income…
Passive Income Streams and Financial Freedom
You will recall from my earlier posts that I suggested you needed to determine what financial freedom means to you, to define it, and write it down.
One of the simplest definitions of financial freedom is where your passive income streams exceed your expenses.
To refine this even further I could suggest that you only consider your ‘necessary’ expenses in this equation.
Everyone has expenses that aren’t necessary for their ongoing existence. Again there is nothing wrong with that, as long as you are monitoring these expenses and not overdoing it.
The key is to ensure that more comes in than goes out.
For this definition of financial freedom, provided your necessary expenses are being covered by your passive income, then you can reasonably say that you are ‘financially free’.
Robert Allen in his book “Multiple Streams of Income” outlines 10 different streams of income, not all of them are passive income streams, however, the book is a great outline of the types of income streams available to everyday investors.
Property and Stocks Dominate
Of the 10 streams of income that Robert Allen outlines in his book, 6 are related to property or shares.
This clearly demonstrates the power of these two popular asset categories when it comes to generating wealth…
It’s no surprise that I am a fan of both, and have spent the last 25 years studying both of these asset classes and developing strategies to generate positive returns.
The key learning for both of property and shares is that they are not ‘Get Rich Quick Schemes’, despite all the promotions that you no doubt will see on a daily basis.
They do involve building up a portfolio of quality assets over time…
The thing I like most about both of these asset categories is that they are relatively easy to learn.
By building up a portfolio of assets that derive income, you enhance your ability to pay for your expenses without having to utilise your paid employment income, creating the situation of true financial freedom.
You can choose to continue to work or to instead engage your passion, do what you want to do, what you love to do.
Passive Income Streams – What the Wealthy Know
If you look at the ‘Rich Lists’ that are published each year, you will notice that a significant majority of people on these lists have made their wealth from property. It is a stand-out performer and one that I have used extensively.
I’ve already mentioned the importance of ensuring that when managing your money that the minimum requirement is to have more coming in than going out. This is the basis of a sound money management plan.
I encourage you to review your weekly or monthly money flows and see where it all goes, categorise income and expenses to make it easier to manage, and get an understanding of your results.
When I first did this process I was shocked at how much was literally leaking out to unnecessary items that weren’t congruent with my goals. Make this something you do this week, you will be surprised what you learn.
This process represents an opportunity to divert money that was previously lost to you, to passive income-generating assets.
Like me, you are likely to have been taught in your younger years to put any spare money into a bank savings account, and that is reasonably sound advice. Only there is one problem…
Have you looked at interest rates around the world lately? The USA only recently raised their interest rates from zero, that’s right zero percent.
The amount of passive income you can earn from leaving your money in a bank account is at historically low levels and certainly will not enable you to be wealthy in your lifetime.
You therefore need to find other forms of passive income streams that are likely to outperform bank interest rates. This brings us back to property and shares…
There is a myriad of factors to consider when investing in either property or shares, and luckily for you, I have created resources to make it really simple for you. The best thing you can do now is register for the free masterclass, The 7 Steps to Invest Like the Wealthy, and learn all about how you can get your money working for you, passively, to secure your financial future.
In the meantime, spend some time identifying where you can save money so that you can engage in passive income strategies.