We should all strive to become financially sophisticated in our 40s. Financial sophistication includes knowledge of taxes, business, interest rates, leverage, real estate, and dividends.
The ultimate goal of this financial sophistication is to create passive income that arrives in our accounts while we sleep. This passive income frees us to make even more money throughout the day.
I am in my 40s, 43 to be exact. I learned about passive income in 2019 when I was 38. I have been on a passive income crusade since the moment I learned of this wonderful tool.
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Last year, in 2024, I sold 2,500 books on Amazon and Draft2Digital. These sales are truly passive because I don’t advertise or promote my books. But, how did I get started?
- Planning for Retirement in Your 40s
- Real Estate Investing in Your 40s
- Staying Debt-Free in Your 40s
- Dividend Investing in Your 40s
- Bond Investing in Your 40s
- Stock & Bond Investing in Your 40s
- Options Trading in Your 40s
- Stocks, Bonds, and Options in Your 40s
- Stock Market Investing in Your 40s
What is passive income? Your parents and teachers probably didn’t teach you about passive income, which leaves you at a massive disadvantage in your 40s.
Passive income comes from assets. You do the majority of the work once and continue to reap the benefits for a lifetime. Let’s look at some examples.
Dividend-paying stocks- You purchase the stocks once, and they continue to pay you dividends. I bought $6,400 dollars (266 shares) of the PIMCO closed-end fund (PDI). It has paid me $2,800 in dividends over four years.
Rental rooms- I use one of my master bedrooms as a source of income. It brings in $12,000 a year in passive rental income.
Rental properties- I own two rental properties that bring in $50,400 in rental income, although I still have to pay a mortgage on both of them.
Book royalties- I have 1,200 books on Amazon and Draft2Digital, which generated $3,000 in passive royalty income in 2024.
Options trading- I don’t trade as much as I used to, but I could earn $2,000 in passive options income based on a $10,000 options account (20%).
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Leveraging tax laws and benefits can also increase your take-home passive income. The government treats most of these types of income favorably to earned income from a job.
Starting from zero. As you can see, each type of passive income source requires time, skill, or money—or a combination of all three.
If you are at zero assets, first read the following Robert Kiyosaki books to ensure you have the correct mindset.
- Rich Dad Poor Dad
- Rich Dad’s Cashflow Quadrant
- Rich Dad’s Guide to Investing
- Rich Dad’s Before You Quit Your Job
- Why “A” Students Work for “C” Students
- Unfair Advantage
The next step is to manage your budget effectively. There is no point in passively generating money if it is falling from your pockets.
You will have a lot of things going on in your 40s, but things should be much better than your 30s. You should be in your prime earning years in the workforce, allowing you to save and invest quickly.
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I recommend keeping your job until you have enough dividend income to live comfortably. Dividends are the most predictable and reliable source of passive income; however, they require the most invested capital.
Start your passive income journey with dividend-paying stocks and income-investing products. These securities are portable, easy to use, and reliable.
The idea is to create cash flow within your budget to allow you to invest in dividends; cash flow is the difference between income and expenses.
Let’s say your family earns $15,000 per month. Your budgeting goal should be to create $3,000 in cash flow to allow you to invest in stocks like Verizon (VZ), British American Tobacco (BTI), and PIMCO closed-end funds (PDI, PDO, PTY).
How do you create cash flow? This is the part of the story where people stop reading. To create cash flow you must take (somewhat) painful measures. You must take drastic steps to see drastic results.
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Looking at our family that earns $15,000, what can they do to clear up $3,000 monthly in cash flow? The first step is to evaluate their housing situation.
My wife and I bought an expensive house in 2020, where our mortgage would almost double. However, we ended up paying zero personal dollars per month toward housing. How?
When we moved into the home, we got two roommates. The mortgage was $1,500/month, and each roommate paid $800/month.
We saved and invested that money, and now we earn $2,300 in monthly dividends. Our mortgage is $1,700, so we can live forever because our dividends exceed our mortgage.
Other steps to creating cash flow include monitoring your entertainment and food budgets. These categories offer the least oversight and cause the most pain.
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Moving past dividends. Once you have a bare-bones budget that allows you to invest in dividends, you can begin creating more passive income streams.
The ultimate goal of these additional income streams is not to add stress to your life but to create money that automatically flows into your investments.
Let’s take my writing business as an example. I could spend 4-6 hours writing and creating a newsletter and earn much more money. However, I don’t need the stress.
I earn about $300/month from writing, which flows directly into my 30-monthly paying stocks account. I do the same for my room rental income and cash flow from going to college.
Putting it all together. The number one thing you must do first is prepare your mind to accumulate assets and avoid liabilities. Nobody explains it better than Robert Kiyosaki.
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Managing your household budget is the first practical step in building wealth. You must monitor every dollar flowing into and out of your household. You should also keep track of all passive income, including dividends, interest, royalties, business income, and rent.
Next, you start investing for dividends. Ultimately, dividends are what will set you free. Alternatively, you can build a large business that can sustain you with residual business income, but this may be much more difficult.
Finally, once you have your budget in place and dividends flowing, you can create small additional streams of income by renting rooms, getting an ATM, walking dogs, etc. This money flows into your dividend portfolio.
If you put it all together, you will continue to see increasing returns from your dividend portfolio. After five years of investing, my wife and I earn $2,400/month in dividends. Imagine what this will be in ten years.
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Conclusion. Your 40s will be financially tough years. Your kids will be going to college, and you will be busy managing others at work.
However, there is no excuse to “stop minding your business.” This means that the most important thing we can do in our 40s is take care of our administrative tasks.
These tasks include reviewing property tax documents, HOA announcements, income tax rates, school scholarships, car and home insurance prices, home maintenance costs, and medical bills.
We waste so much money by glossing over important costs around our homes. This is one of the main reasons I decided to retire early.
I wanted to review all the documents surrounding my home and financial situation to understand my tax situation better. I can now clearly see how the working person loses a lot of money through waste.
Therefore, your goal in your 40s is to gain control of your financial situation. You should have no long-term credit card or student loan debt, an emergency fund, and, most importantly, an understanding of passive income. Good Luck!
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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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