If you are like the majority of Americans, you wake up in the morning and go to work to earn money. We need the money to live, but wouldn’t it be nice if you could wake up in the morning and earn money without working at all? It is possible, but you need something that will work for you.
Even with our recent market corrections, more and more people are becoming financially independent in their 30’s or even in their 20’s. It doesn’t require a lottery ticket and a bolt of lightning. Savvy investing, smart spending can be a sure fire way to pave the road to easy street.
The first thing that you need to do is to understand what financial independence really is. Essentially, it is the point at which you no longer have to go to work because you passive income from investments, businesses or hobbies are earning more than you spend.
Passive Income > Expenses = Financial Independence
There are 2 sides to this formula: passive income and expenses. In this article, I will focus on what passive income is and discuss 3 ways to increase your passive income.
Each dollar is like a little soldier that can be used in 2 ways: it can be invested and work for you day in and day out for the rest of your life, or it can be spent and leave your life forever.
Usually when these little soldiers come into our lives, we send them away without so much as a thank-you. Some spending we can’t help, but rather than buy a latte today, you could put that money to work, and it will work 24/7 for the rest of your life, building and defending your little empire.
This also works the other way. Every time you borrow money, you put a soldier to work in an enemy camp. You actively invite in an enemy soldier that works against you. Every day, debts tear down your empire and take more of your soldiers away with it. You have to work harder to account for it, and it works 24/7, so you have to work extra hard to beat it.
The first rule in becoming financially independent is understanding the power of money to work for you, or against you. There are plenty of ways to get money working on your side, or at least working against you. The first place to start is your savings account. Even at 0% interest, it is better than minus 100% if you waste money on something you don’t need. The first step, and often the hardest is going from minus 100% to the 0% you can get in a savings account.
Once you have a bit of cash, even a few dollars, certificates of deposit (CD’s) are some of the safest and easiest investments you can make. Any bank or credit union will offer CD’s with a rate around 1.5–2.5%. This might not be the highest return, but you are still guaranteed to get it all back, with the prearranged interest.
Investing in equities offers higher rates of return, but buying individual stocks can be risky and is best left to professions. Putting your money in an index fund like the Dow Jones or the S&P 500 is a relatively safe option for the beginning investor and will kick back an average of about 4% year-after-year.
Prosper and lending club are P2P financing options that allow investors to lend money direct to the people who need it. These allow you to diversify your portfolio by lending small amounts to people at a rate that depends on how risky you feel they are while earning a higher return, usually around 6–7%.
They are quite simple to use. Say, Joe was offered a new job, but he needs to own a car to do it. He found a car he can buy privately for $2000, but he can’t get a loan from the bank because he doesn’t have the job yet. He goes on the site, explains the situation and you offer to lend him $20 of the $2000 loan he is requesting. You state that you are willing to do it for 8% over 2 years. If he accepts it, it goes into the fund. Once he gets the job, he starts to pay back the loan and you get a monthly payment of about $2. That isn’t much, but your risk is quite low and if you can make a few hundred of these investments, the site tracks them all automatically and your account keeps growing.
All of these options are generally safe are sound ways to put your little soldiers to work, 24/7 with very little effort on your part. There are other options that involve a combination of your time and money to increase your ROI.
The next option is to start or buy a business that can operate much of the time without you. Be careful here. If you want to start a business so that other people can do all the work for you, you will not succeed! With very few exceptions, businesses succeed because the owner has a grand vision and LOVES to work on the business. It’s only after years of hard work and carefully grooming and training of people to take your place, can you expect to turn a successful business into a truly passive income.
A very common investment business that can produce a passive income is real estate investing. It is a time-honored tradition with tens of thousands of people who are able to be quite successful at it. But don’t think that this will start out a cash cow for you. Like any business, investing in real estate takes know-how and a willingness to get your hands dirty, literally. Before you dive in, educate yourself on what it will cost in time and money to do it right.
Another option is to turn your hobby into a cash machine. Many people have hobbies, which can earn them money that they do just because they enjoy doing them. Card collecting, blogging and telling people about products they enjoy, can all become sources of income that, while not always passive, you are doing anyway.
For example, if you spend all day on Facebook telling people about what you are buying and giving them advice, start a blog. Choose a narrow niche and run with it. Once you have a following, monetize it through affiliate marketing, ads or by offering a product of your own.
Each day we make hundreds of decisions about who the little “dollar soldiers” will work for. Each time you let one stay with you, they grow your little empire and start to work with you and you are one step closer to financial independence.
By making smart choices and investing your money, you can start to build a passive income that will exceed your expenses, as long as you have your spending under control.
Featured image credit: PEXELS
Jul 13, 2015
Jul 13, 2015