The Passive Income Strategy

Hi All,

Today’s posting is about one aspect of the processes of building wealth: passive income.

So, what is passive income and does it make sense for you? Definitions differ, but according to the federal code, passive income or passive activity is any activity that involves the conduct of trade or businesses that the taxpayer does not materially take part in (1).

The idea behind passive income (PI) is that it allows one to build up a stream of money that doesn’t necessarily require a lot of labor to maintain. A number of personal finance gurus promote the idea of PI. Among these are Robert Kiyosaki and Robert Allen. Proponents of PI argue that over time the amount of money coming from passive income will eventually outstrip one’s expenses. The boosters call it the “point at which you achieve financial freedom”. Basically, if you get enough coming in from your investments you won’t have to trade your labor for wages – freeing you to do things you find more valuable.

Does passive income make sense for you? It depends. Before deciding on this strategy, you might reflect on your current level of debt as well as your current income. For example, if you have a ton of credit card debt charging you 20% – no passive income strategy is going to provide a return better than paying off the debt.

Similarly, there is no such thing as a free lunch. If you already have a good job, you might want to invest more heavily in improving your job performance than in the time it takes to research and implement a passive income strategy. PI does take time, so you need to determine if the money you get will be worth your time invested.

If you do want to do it, here are some realistic & effective ways to build passive income. They all require effort, but less work than going to a 9 to 5 job.

1) Stocks & Bonds:
– Investing is a good way to improve your passive income. A number of stocks and several bond funds pay dividends and interest on a monthly basis. Like any asset class, due diligence is required to be sure your investing products are sound. That said once you do make a purchase, there isn’t a whole lot of daily effort that’s required to keep tabs on the investment.

2) Building A Webpage:
– We aren’t experts in this regard, but several people we know have become quite successful bloggers in their part time. Also, some others have become successful with ebay niche sites. Of course, getting set up on the web takes some education and start up time, but again its less than a full time job.

3) Real Estate:
– Real estate works. It works, but it takes some doing getting set up. First, you need to find the right piece of property and then you need to manage it. Sometimes there can be a great deal of work involved, and tenant issues can be problematic. That said, if you manage to overcome these challenges – and many people do – then real estate can be quite profitable.

One thing about a lot of bloggers is they write about money, but you don’t know if they are good at it because they don’t disclose. So in the interests of transparency here are our numbers: We make approximately $600 a month on stock dividends, approximately $600 a month from blogging and $85 bucks a month from our real estate investments. If I had the past to do over again, I’d probably focus more on blogging earlier. Of the three investments, this approach requires the least start up capital and only a bit more time than stock investing.

Best,

James