How would your life look without a paycheck? This is a question that we should be asking ourselves every day. But Josh, why should we be asking ourselves this every day?
This will help us identify all of our residual and passive income. Remember, the goal of financial independence is to completely live off the income from sources other than a paycheck. The best way to perform a test run of your retirement/financial freedom is to run this drill.
For all of us with a defined benefit retirement (this means pension), I want you to perform this drill without your retirement paycheck. Yes, I know, this will make it a lot harder. However, that is the whole point. We need to prepare ourselves for the toughest situations possible, and then build cash flow retirements that will survive. After that, any cash flow will be a bonus. We want our retirement checks to be a bonus. Let’s get started.
Pay Down Debt or Start Investing?
Residual employment cash flow. We are going to take away your pension plan. This includes your military, post office, or any other government or corporate pension plan. So what does that leave you with? You are left with your 401K, Thrift Savings Plan, Roth IRAs, traditional IRAs, and social security. Go ahead and jot down the amount that you predict, both before and after retirement age.
My income would look something like $0 until age 60. Withdraw TSP at age 60 for roughly $700 a month. Finally, social security at age 67 for about $3,000.
Rental income. This includes any income from rental income to include rental rooms, finished basements, finished rooms over the garage, finished basements, attached/detached in-law suites, rental houses, proceeds from harvesting land, etc. We should all have an emergency plan to rent out a room or two if needed. If you lose your job suddenly, it is good to know that you can bring in $600-$1,200 a month.
My income would be roughly $2,200 a month now. We could increase it by renting another room or adding an Airbnb room.
Investment Income. Your investment portfolio should always have a portion set aside for emergencies. I keep mine in a high yield savings account and in treasury bonds. Besides those, you should still have dividend income flowing in. Try your best to prevent selling shares in order to build capital. There are other ways to make money in a pinch, you just need to learn them. That is why we are doing this exercise.
Taxes 101: Understand the 3 Types of Income
My income would be roughly $200 a month of dividend income. That is enough to pay for some of our utilities, phones, and Hulu/Netflix. Not too bad.
Residual Business Income. This would be business income that you earn outside of your job. This is why it is so vital to start building a business RIGHT NOW. We never know what will happen in the future, so we need to prepare for the worst. Having income from sources outside of a W-2 job is certainly a way to diversify your income. It doesn’t need to be a huge sum, but even $500 a month should pay for either your food or utilities.
My income would be about $20 a month now. Businesses take a while to get started but gain momentum rather quickly.
Totals. Currently, my total is about $2,450. I feel comfortable with this amount because I also know other ways to make money. This could be starting a Turo rental car business or finding land to sell. Also, since we have some cash, we could invest in an RV, or similar vehicle, in order to rent it out. Also, we could pay for RV hookups and rent those out for $400-500 a month.
Build the Mindset of an Investor
So not only is it important to have residual/passive income already established, but it is just as important to have a plan to understand future business or rental income. Sometimes just being educated in cash flow is as important as the cash flow itself.
Hopefully, this drill was beneficial to you. It should have opened your eyes to your world in the event of a job loss. We have to be prepared for these scenarios. The government and corporations have no loyalty to us. Nothing that we do is greater than their institutional needs. Always remember that you are expendable, just as I am. It will keep you grounded and ready for the worse case. You are your greatest asset.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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