Everybody’s dream should be to have complete freedom of time because that’s when we are at our happiest. Can you imagine traveling anywhere in the world with your friends and loved ones, at any time you all want?
Unless you were born with assets that allowed you to make these enormous travel plans, you need to build your own financial destiny. Therein lies the rub. The general population tells us to work hard and have nice things from a young age.
In fact, this is the worst advice that we can receive in the twilight of our youth moving into adulthood. Exchanging time for money is a never-ending hamster wheel of pain and regret.
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When we exchange our time for a paycheck, we lose our freedom. Someone else controls our daily schedule, income levels, fear, and desires. If you just bought an expensive house, how likely are you to transfer to a new job?
So, we all need a plan to wean ourselves off earned income and live from other passive income sources. If you are confused (about passive income), please read the “What is Passive Income?”
I have been writing about financial mindset, retirement planning, investing, cryptocurrencies, real estate, and business for over a year. I have published over 650,000+ words this past year, and I aim to do similar over the new year.
However, I just read the book “Infinity Investing” which spelled out the three steps to happiness in the most straightforward format I have seen. If you can follow these three steps, even slowly, you can set yourself and your family free.
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That’s the most crucial takeaway from living on passive income—once you learn the secret, you pass it to your entire family. But what are these three steps to living on passive income? Let’s take a look at each of them individually.
3 Steps. The three steps to go from working a job to chillin’ on the beach are:
- Use (earned) income to pay for assets.
- Use assets to pay for expenses.
- Use assets to pay for liabilities.
1) Use (earned) income to pay for assets. This step is the most difficult to understand and execute. The reason is that the media, parents, school, and work brainwashed us to use earned income to pay for expenses and liabilities.
Let me explain how this looks. Let’s say your after-tax income is $10,000/month from your job. You invest 5% towards your retirement, and the rest is fair game. You have a lovely home, luxury vehicles, children in private school, etc.
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If there is any money left after your expenses, you use that to save for vacations and jewelry. You believe that the 5% savings rate is enough to carry you through retirement.
How your money should function. If you do not have assets, your number one goal is to obtain them. Everything should fade away outside the relentless pursuit of building your portfolio of investments.
If your income is $10,000/month, determine the actual amount of your expenses. We will say we can live comfortably on $5,000/month for this scenario.
The remaining $5,000/month goes towards building your stable of income-producing assets. There are many types of assets such as dividend-paying stocks, interest-paying bonds & crypto, rental real estate, royalties from creative pursuits, and automated business.
Some of these assets cost money (dividends), and some you can create for very low cost (royalties). At this point, you should be using all of your investable income and spare time to create passive income streams.
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2) Use assets to pay for expenses. Now, the fun has begun. The total amount of our costs is $5,000 per month. Our new goal is to have our assets produce enough income to cover this amount.
Once our assets produce $5,000/month, we are financially free and work-optional. It may take a while if you are trying to accomplish this amount of income just from dividend stocks. Depending on your investment style (dividend growth, income, or index funds), it could be anywhere from $1.5 to $3 million.
However, that’s why we are not aiming for a specific amount of cash; we are looking only at our cash flow. I covered this topic more in-depth in “Net Worth vs. Passive Income.”
Therefore if I wrote books ($500/month), started a YouTube channel ($1,000/month), rented my car ($500/month), had dividends ($1,000/month), and harvested beneficial insects ($2,000/month), then I have my $5,000/month.
This logic is what messes most people up when building assets. They believe dividends and real estate are the only forms of passive income. The more you understand the process of building businesses and royalties, the faster you can arrive at your destination.
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However, we decided to get there; we now have $5,000/month in passive income. You are now financially independent and work-optional—enjoy your life. I would continue to work until I had more passive income because you never know what the future brings—but that’s just me.
3) Use assets to pay for liabilities. The final step is the most fun. This step is right up your alley if you love having nice things. Whether you buy furniture, a car, or an RV cash or not, it is always a liability.
The maintenance, insurance, gas, and registrations come directly from your pocket—making them liabilities. But, sometimes, these items bring joy to our lives. I personally don’t care for these high-end items, but I can somewhat see the appeal.
Now, after you pay your expenses with passive income, you can use the remaining cash flow to purchase something nice for yourself.
For example, if I knew that I always wanted to have a brand new car with an $800/month payment, I would obtain an asset to cover this expense. I could create an income portfolio on M1 finance whose sole job is to spit out $1,000 of dividend income every month. That account would need to be roughly $150,000 (at an 8% dividend yield).
Is Rental Income the Best Type of Passive Income?
Conclusion. Once you get to this point, you can do pretty much whatever you want. The world is your oyster, and you have the time and resources to experience everything you imagine.
Hopefully, you have maintained healthy relationships with your spouse, kids, family, and friends. There is no point in being free if you are alone.
It may seem like a lot of work and a long time to achieve, but you could probably become work-optional in five years. That, of course, depends on your starting debt levels, but anything is possible.
In roughly two years, my wife and I got out of debt and built a $200,000+ dividend portfolio. We are already financially free with my military retirement, yet I still work. I want to build up my (book) business and website while having a nice, steady paycheck.
Just because you have a job doesn’t make you wrong. You only need to start to think about slowly (or quickly) making yourself independently wealthy. If you have little money to purchase dividend stocks, please look into my Passive Income from Creativity series, where I show you how to make great money with your talent.
America was wrong, right from the start. Buying a car (and other liabilities) with earned income is one of the worst things we can do to our finances. Our passive income (dividends, interest, rents, royalties, and automated business) should purchase all of our nice toys. If you follow these three steps, you will be successful.
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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. All Right Reserved Military Family Investing
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