Throughout the Cash Flow Series (101, 102, 103), we have explored how to turn our dream retirement into a cash flow reality. Now, it is time to take our first real steps into creating and starting our plan. It is through these small steps that we will walk along the path of financial freedom.
The path to financial freedom can seem long at first, so we need to prepare our mindset before we start. We do not want to believe in get-rich-quick schemes or “quick turnarounds.” The only way to obtain wealth is through education and action.
I make this statement because there are a few unrealistic ideas that can slow us down on our path. When we believe that things will be easy or fast, we tend to focus on skewed timelines- such as quitting our jobs to pursue a business, becoming a YouTube star in a few months, building an audience quickly, or selling products to random strangers. If we try to hang our future on short success stories, we may become disappointed.
Dividends vs Royalties: Part I
I want to walk through how a standard employed individual can use all four pillars (retirement, investments, business, and rental income) of a cash flow retirement. Using all four types of retirement cash flow isn’t about having vast sums of money when you start; it is about understanding how to combine and employ these assets. Over time, you can build a more extensive portfolio in each pillar. Let’s take a look.
Retirement Income. Most of us will start here- as an employee. Being an employee has its benefits, such as some security and consistency. Being employed helps us buy a home and start a family. You can begin to build your Retirement 4-50 plan here.
Your employer may match your contributions inside your 401k, so it is imperative to take advantage of this free money. Starting a Roth IRA on your own is also a good idea. You put taxed money into your Roth, but it will grow tax-free for the duration of time. Even if you leave this money to your children, it will be tax-free.
There are not too many jobs with a defined benefit pension plan. Most of the jobs that offer these types of pensions are in the government. You may want to look into either a military career or a civil service job. Having a pension is a great way to start your cash flow retirement.
Don’t Gamble Your Retirement Away
Social security rounds out your retirement income. None of us know how social security will look going into the future, so we want to put ourselves in a position that social security is “nice to have.” Annuities and life insurance are also ways to generate income throughout retirement.
Investment Income. Building your money system or investment income will probably be slow going. For most of us, investing in the stock market is not a wealth generator (read Cash flow 103). The best mindset to have is to celebrate your small dividend income gains. Your dividend portfolio will start with a few cents and begin to build into a few dollars. Eventually, you will be able to buy lunch and other small luxuries: embrace, and document, the journey. I have a whole series on Investing for Dividends.
Investing for dividends is supposed to be boring. Boring investing is usually good investing. You find corporations and ETFs that you feel strongly about, and you slowly build long-term positions in these companies. Most of your dividends should be reinvested- adding to the compound effect.
When is Enough Money….Enough Money?
Investing in capital gains can also lead to financial freedom. I have a few growth stocks, but I use index funds as my growth securities. Index funds are safe vehicles that track the market. They do not try to beat the market. If I want superior gains, I can earn that outside of the stock market via real estate or business. Please read my stock market investing series.
The last pillar of investment income is bonds. I wrote an article on Municipal Bonds, which are tax-free. Also, you can use government treasuries and bond funds. Bonds and stocks usually have inverse responses to economic conditions- meaning they behave differently. Having a position in bonds can help long-term gains.
Real Estate. Real Estate is a mindset. The best philosophy for real estate is to control your out-of-pocket real estate expenses. I wrote Mortgage Zero because my wife and I pay no out-of-pocket real estate expenses. Keeping your real estate expenses at zero is a wealth generator. If you decide to buy more real estate properties on top of this, that is great. However, if you can control your expenses, you will be shocked at how fast the income starts to flow.
The number one expense in an American’s life is real estate. With everything included (mortgage, utilities, maintenance), it is over 50% of our income. So reducing this amount to zero is a game-changer. You can control your expenses in a few ways: buying a small home, getting roommates, creating rental storage space, renting your garage, building RV hook-ups, Airbnb, starting a business, etc.
6 Traits of a Successful Entrepreneur
Once you have successfully eliminated all of your real estate expenses, you can begin to look into obtaining more rental properties. There are ways to buy properties with zero or low money down. Be creative. You want as little of your money invested into the property as possible- ensuring our money is in an infinite return sooner.
Once you become established in real estate, there are even more ways to generate income. Private money lending and creating real estate notes are just a few ways. Whatever the case may be, the best idea in real estate to focus on your expenses and branch out from there.
Business. Business income is the grandest of all revenue. Starting a business is what most people envision their life to become. However, running a company takes patience and an understanding of business principles. Whether it is a product or service, people will need to know, like, and trust you– if you want to sell something to someone. You get people to know, like, and trust you by creating value in their lives.
Most people who start a business think of themselves first and customers sense that they are only out for profit. Most businesses do not succeed in America, so when you start your business, start small.
What Would Your Life Look Like Without a Paycheck
There are two types of business income that I focus on: Royalties and Automation. I recommend that everyone start by creating royalties. By building a base of royalties, you are learning the basics of business. You will be making a product (books, music, videos), advertising, marketing, and improving over time. From there, you can add affiliate marketing, merchandise, and other items to upsell. For your business to succeed, it needs to add value to your audience, which will make them customers.
Next, you can start an automated business. You will have built robust business tools throughout your royalty journey. Plus, you will already have an audience that knows, likes, and trust you. Your business can be something that may appeal to your existing fanbase. Grow your business only when it makes sense, do not rush it. Remember, it is only a part of the larger plan; if it is not our wealth generator, that is okay.
Putting it all together. Always keep a view of the larger plan. If you can create any income, no matter how big, in all four pillars, consider yourself successful. You have learned how to diversify your income across four significant types of income. Preparing for the next financial crisis or economic disaster by diversifying your income can help you excel. Let’s look at a simple example of how someone could create income across all four pillars in less than a year.
Ron works a 9-to-5 job making $75,000 a month. From this, he contributes to his 401k, a Roth IRA, and rents a room in his house for $600 a month. Next, Ron keeps his expenses low to invest all of this $600 into his dividend portfolio. He also maintains a herb garden where he makes a $100 a month business income- and takes it a step further and creates YouTube videos about his garden. From this, he makes $200 a month from YouTube.
Minimalism: 7 Ways it Leads to Financial Freedom
From the example above, it may seem that Ron is only making $800 a month extra income. Most people will scoff and say that they can make more by driving uber and working overtime or a second job. They do not understand the power of passive income or an infinite return. They also do not know that the rich do not work for money.
Ron has three assets in an infinite return, the rental room, herb garden, and YouTube channel. He has very little invested; however, they make him money. Over time his YouTube will grow, and he will sell books or courses from his works. The most crucial part is that Ron has control of his time and his earnings. To become wealthy, you need to control both of these. With Uber and overtime, you do not control your wages or your time.
What will your long-term strategy be? Remember to start small in all four pillars. You may only be able to invest $5 a week. That is okay. Over the long term, the knowledge you obtain from this $5 a week is more valuable than anything else. We all have to start somewhere. I implore you to explore content creation, business, investing, and mortgage zero. Using a combination of all of these will ensure that you are well diversified and ready for a passive cash flow retirement.
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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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