On the last post, we discussed the tax benefits of passive income versus active income as applied to earning a $50,000 salary at your day job versus earning the same amount through real estate as a real estate professional.
By ditching the commute to the cubicle, Passive Pia’s take home pay was 24% higher than Paycheck Pete’s and she no longer had to put in requests for vacation.
She was the master of her universe.
Best of all, she worked less than Paycheck Pete once she hit her passive income goal.
Think about that…less work higher outcome. How neat is that?
Now…before you get all excited and try to replicate Pia’s simple strategy, I need to warn you that it is not easy converting active income (paycheck or self employment income ) to passive income. It can be a long and arduous road based upon my personal experience.
As the saying goes, just because something is simple doesn’t mean it is easy.
To make the leap from active to passive, the first step is to start with your WHY versus your WANT.
We need to tame your Lizard Brain and tap the Neocortex portion of your noggin so you can make sustainable action.
Let’s face it, most people want passive income but won’t take the actions to both implement and stick with the plan because it can be so darn difficult converting small amounts of seed capital into a massive passive income stream.
- Most people want to lose a few pounds but won’t change their diet.
- Most people want to save money but won’t cut back on the non essentials like upgrading to the latest iPhone.
- Most people want a better career or higher salary but won’t take the steps to advance their skill set.
- Some people will even skip a morning latte thinking they can become a millionaire. Really?
I’m not a behavior psychologist, but it seems like the primary obstacle you face in improving your financial situation is not having a compelling enough WHY.
If you can master this mindset you can tap the inner strength that pushes you forward when the going gets tough and your are just about to give up on your dream.
Kinda like Mel Gibson in the movie Braveheart.
Remember the scene just before he meets his maker?
He screams “Freedom!” Right before the inevitable.
Now that’s a powerful WHY.
I’m not going to get all Tony Robbins on ya. Forget the booming voice, getting you to jump up and down while I strut across a stage with wireless headset. At 5’8″ I’m too short for that.
Let’s leave that to the gurus who love to pump ya up over a weekend boot camp and then sell ya a bunch of books and tapes that tell you you can visualize success and achieve financial freedom.
Nah…been there done that. I’ve spent thousands on this stuff and all I have to show for it is some dusty books and cassette tapes (do you remember cassettes?)
Think about it. Do you really think you can plaster positive affirmation sticky notes all over your house, car and cubicle and dream your way to your goals?
Is your problem you don’t have a millionaire mindset?
Who the hell DOESN’T think about becoming a millionaire?
Remember the best-selling book The Secret?
Sorry to burst your bubble, you can’t change your situation by visualizing a feather.
Hey…If you could dream your way to passive income, my thirteen year old would be a billionaire right now.
Yup, she’s an odd duck. Wants a big ’ole mansion, private jet, equestrian ranch and all the bling.
All I’m saying is you need strong enough WHY if you wish to succeed in converting your day job to “almost” no job.
While I’m a big fan of goal boards, keeping a positive attitude and creative visualization, these techniques will only get you psyched up and allow you to recognize opportunity as it dances down your life path.
The missing link is doing versus dreaming.
“Crap, I think I just reverted to a late night infomercial dude in a tight black t-shirt strutting on stage in front of a giant video screen.”
“Sorry!”
So what is passive income?
It consists of three forms according to the IRS.
- Real estate
- Portfolio
- Business
Of the three, I focused on the real estate portion when I began converting my self-employment income to passive income.
Here’s why
1. My banker would loan me 80% of the money I needed to hit my massive passive income goal.
2. The IRS wouldn’t tax me on all the income. Better yet, they encouraged me to buy more buildings, fix em up and purchase all kinds of bling like carpet, cabinets and stainless steel appliances.
3. My tenants would pay my loan for me.
4. The interest on the loan was tax deductible.
5. If the tenants didn’t pay, I could take them to small claims court and the judge would make em.
6. If the tenants wouldn’t leave after not paying, the Sherrif would show up and evict them.
In a nutshell, that is all ya need to know about real estate investing.
The other two approaches seem like way more time and money.
For instance, if I want $50,000 of portfolio income to match Passive Pia’s rental income I need an investment portfolio of at least $1,250,000.
How many people do you know who are sitting on a million+ taxable?
We will get into the difference between a taxable million dollar portfolio versus tax deferred IRA or 401k portfolio later.
Just remember that a million+ in a taxable account is typically worth 25% more than in a tax deferred account.
If I want $50,000 annual income in a passive business, I’ve got a whole new nut to crack.
This is the Warren Buffett strategy-invest lots of capital upfront to purchase a sustainable enterprise and then pray you can keep your market share and hope the manager of your business doesn’t burn out or screw things up.
Sometimes a bad CEO meets a good business and it ends badly.
Can you say Enron?
Anyone?
Buehler?
As I mentioned earlier, creating passive income is simple but not easy.
What’s your why?
Will it drive you to get up early or work insane hours to hit your goal?
Will it drive you into Silicon Valley start up mode?
Nail your WHY and you are on your way to replacing your paycheck
Further Reading:
Wonky Brain Theory
Mel Gibson Freedom-Hooah!
The Secret
Ferris Bueller’s Day Off
Leave a Reply