The debate over passive vs active income
Although many would attest to a debate over active vs passive income, we believe there is no debate - Passive always wins. Let's explain why.
In this episode we will talk about how to make your income with Smart money, how to focus your brain and habits to find opportunities that no one else finds, and I’ll give you a real world example one investment strategy, not the only one, but one that has worked for me before.
In this episode we will talk about how to make your income with Smart money, how to focus your brain and habits to find opportunities that no one else finds, and I’ll give you a real world example one investment strategy, not the only one, but one that has worked for me before.
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Ask yourself this question.... When it comes to making money, do you want it forever, or do you want it now? The reason why 80% of Americans are living from pay check to pay check is because they answer that question with the latter option - NOW. The rich don’t want income NOW - they want it forever. If you really want to be rich, you will do everything in your favor to set yourself up so that there is little urgency with making money and you can be patient. With patience you get the treasure. If you need a lot of money immediately, you will never be rich.
It is really important we think about this. Those that have rent to pay, food, utility bills, credit card collections, etc. are just a reflection of the debt enslaved world that we were all served up at an early age. They have to go to a 9-5 job and all the opportunities to really make money are not seen because some employer had 100% of their focus for fear of losing that income stream. They are following in the same footsteps of the herd and we all know how that works out. They find justification in this because they need healthcare or employer matched 401K investments, or stock options, or some potential for a raise or bonus if they perform well. But this is a setup to only benefit their employers. They go home to the same rented or mortgaged home, deal with stress from their bills and never question if their methodology is flawed.
Consider the same situation for someone who is rich. They get up in the morning when they want to because they are passionate about something they are doing. They travel and see more of what the world may offer them. They partner with others to make money in areas they are not experts in. I’m not saying that it isn’t hard for them either - but they live life on their terms.
Other than those that have a trust fund or inheritance, those that made their money by an invention or creation of something, deserve it. But there are a massive percentage of wealthy people who don’t measure their wealth by some massive net worth statement on a balance sheet. They measure it by having more than enough cashflow to meet their month to month needs in such a way that it is generated without their human effort, and has more guarantees of landing in their bank account than the W2 salary check from an employer. Those that have the cashflow to live like this are truly unconstrained and have won their life back. It is far more achieveable to be that type of person in the 21st century than the likelihood of you becoming rich through inheritance, winning the lottery or gambling at it. And certainly more achievable if you have all your time to invest in this pursuit - where you are not battling with an employer for it.
And here’s something positive you may want to hear. You don’t need to follow down the flawed path of saving $1.7 million in order to retire. That number is the latest, fancy statistic than some personal finance coaches are selling you. The reality is that it is pure BS. What you need is enough money coming in to support your cashflow needs on a monthly basis, and to think that the only source of that is a massive bank account or stock portfolio is pure insanity. If you need $5K or $10K a month to live comfortably, how about we find a way to make that cashflow coming in with little or no human effort on your part, rather than putting some unobtainable number out there to depress everyone. Later in this episode I’m going to give you an actual case study that shows how these numbers work.
This is the definition of “Smart Money” and this will be the topic of this podcast. We will look at how this works, ensuring you have taken the information already presented to you from previous episodes to set yourself up so you can pursue smart money. If you haven’t, unfortunately you are not ready for this yet. Yes, it is far more “sexy” to talk about making money than the drudgery of saving and budgeting, but the truth is that we are all about KEEPING the money you make and not losing it to bad decisions, etc. So you need to be in a place where your burn rate is at the minimal level, which will propel you like a rocket towards being unconstrained. Get that right first - now we’ll take this up a notch and focus on the income generation part.
Let’s begin this adventure. Like all journeys, you need to make sure you pack correctly for it. In your case, the “packing” means preparation. I’ve already told you about burn rates. Now we will start to tune your mind for what you need to discover on your journey and why we are doing this.
Owning the eggs or owning the goose
Simple question - Would you like to own eggs, or the goose that lays them? A salary is like receiving eggs. You sell your time for the eggs. When you stop selling your time, the eggs stop. Maybe you take a stockpile of eggs you have earned over the years and give them to a “trusted” third party for you. Then when you stop selling your time, that third party hands the eggs back to you, one at a time at a pace consistent with your need to consume them. But if the efficacy of the eggs changes, or if the third party can’t be trusted or goes away, or if your need for the eggs increases at a pace that eventually means your supply will run out, or if your life goes through some adverse event requiring a lot of eggs all at once, then you never get off the treadmill. You might want to “retire” from work and receive eggs, but no one can predict the future. If you are forced to go back to the work to earn more eggs, then you feel like a failure and have to start working back at the entry level again - even if you can find a job in your post 50 year old career.
This model is what is sold to all of us. Go to school, get a good job, work hard, save, raise a family and retire. It is the quintesential 1950s American dream. It is probably what your parents told you, and probably what their parents told them.
It doesn’t work (at least not today). So what if you owned the goose. It lays eggs regardless. You just feed it, and nuture it, and you get eggs. Forever. You don’t need to save them because there is an endless supply of eggs. You could sell them to others if you generate more than you can consume. You could get many geese and scale this up to be a rich egg generator. That is your choice, but the simple difference here is that it is ALWAYS better to own the means of production, than to be a slave worker in it.
Everything we will teach here is about owning the goose. However you may have to outlay money to buy it up front. The question is whether you outlay your money or someone else’s. We’ll look at different scenarios depending on what you are buying, but if you can, use your savings to buy the means of production for income for you for the future. Don’t just stick it away in some Index fund somewhere because someone who talks with complicated words and uses terms that make them look smart sold you a faith based methodology here. Because the same people will go back into the shadows if the markets turn and the returns are not there, or that the markets erode your investments because enough people lost their faith in some part of the human experience and reflected that with what they perceive the value of stocks to be.
Money and opportunities are always out there
Here’s the thing they don’t teach you in school. Money never disappears - it just changes hands. And opportunities don’t just go away in a bear market or a recession. They are just only seen by those that have minds trained to unveil them.
You see obtaining money is like herding cats.
Cats are lovely animals. They purr, are nice to pat, sit on your lap, etc. But if you go out there trying to herd them, they will run away. They don’t want to be constrained. Neither should you. But if you try and constrain them, it normally ends in frustration. When you advance to the cat, they run away. When you least expect it, however, they come back to you, purring and demanding your attention.
Money is a bit like that. If you go attack it, trying to get it, you find it is like cats - it will run away from you, requiring you to exert huge amounts of energy to run after it. It will frustrate you, and most people will feel dejected, like a failure. But if you are attractive to money, it will unveil itself. Like the cat, it may even come to you. It is about you being as attractive to money as you can make yourself, and being as aware of where it is and where it is going to be in the “right place at the right time”. Then you can snag the money with little or no effort.
Money is just a language that people use to communicate with each other. You need multiple parties to have a conversation, just as you need multiple parties to have a transaction. Like languages, there are many dialects. But if you know that making money is about communication, then your preparation has to be about being an attractive communicator. And I’m sorry to burst your bubble, but communications won’t be done to make money texting each other on a smart phone or on some Facebook Groups, etc. It is done in person - man-a-mano. That means you need to learn the art of communications, practice good personal hygeine, be presentable, wear clothes that show you are there to do business.
You need to have researched the other party you are dealing with, what are their goals and what are yours so that you can speak to the commonality between you. Not try and con them into anything that isn’t in their interest. Or be conned into something that is not in yours. Long term relationships matter because most of the time business can only work if there is trust between the parties, and trust is something that is typically earned by actual experience. And if you are ethical and trustworthy and you are dealing with ethical and trustworthy people, word will get around. You will never need to go in search of money because the word of mouth of the community you live in will return back more opportunities that are well vetted all day long than you know how to deal with.
Warren Buffet, one of the world’s most successful investors, said it best with this: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”
Do you think the rich spend all their time cold calling people to make money? No - they already have a solid community that they are well known in, and known in for the right reasons. They are trustworthy and ethical. This is the key - if you don’t present yourself as someone worthy of being in that club, you will never get membership to it. Once you do, however, if you stay in there with the same ethics and trustworthiness, you will never need to leave it. Just keep yourself active and make yourself known and the opportunities and money will present itself to you.
Like being an attractive option to the cats. You can chase them until dark, but they will just run away. But if you understand what cats want (probably food) and present yourself as a trusted provider of that, they will come to you, guards down and present a persona to you that you want to see.
Think like a surfer
This is one of my favorite analogies because it comes from my actual experience. When I was a teenager, a bunch of my friends in Australia would get together and go to the beach to spend the day surfing. We bought surfboards with our hard earned money and one of my mates had a “Kombi Van” (or what they refer to in the USA as “VW Microbus”). We would tie our boards to the roof racks and head out to the beach in search of the ultimate ride.
Some days the surf was great; other days the ocean was flat. You might research out different beaches ahead of time, but in those days we didn’t have the Internet or GPS weather tracking, etc. You would seek out knowledge from the people who lived near the beach - “Local Knowledge” as it was called. Maybe you could make a friend down there, and call them ahead of time and ask if the surf was good or bad that day. But we would still just want to go. I mean a day at the beach even with flat waves is better than a day at work.
On the days when the surf was good, you would get all excited once you saw it from the car. Then you would wax the boards, get your wetsuits on, and get out there to ride the waves. You would feel the water, taste the salt, and begin the paddling journey out to the sets you wanted to be at. Typically there were multiple sets (normaly 3 or so) and the waves at the very back would often have the largest waves. But they came with the danger of deep water and rips, and you would only want to go out there if you were a strong swimmer. I could see the waves in the distance and prepare myself to choose the right one to ride.
I realized after repeating this cycle over and over again, that the best rides came with me being best prepared. There is no better feeling than the adrenaline rush you get from riding a great wave, turning the board to run alongside the front of it, getting into the curl of the waves, feeling its energy. It is a total out of body experience. For those that surf, they will know this. For those that don’t, you are seriously missing out on an incredible adventure.
There are some things you really start to understand as a surfer though. You will constantly get knocked down, hurt, thrown around, dumped on, etc. The ocean is a powerful adversary. You will learn very quickly - at least it took me many days of being dumped on, etc. that you can’t fight the ocean. It is way more powerful than you are, and you have to learn to be at one with it. That’s lesson #1 - you can’t force yourself onto it - it comes to you and you have to be prepared.
This is where the wisdom came to me. If I chose the right wave, was in the right position to catch it, paddled well ahead of it coming to me, so that I was the most attractive option for it to pick me up and propel me forward, then I could get up, get in position fast, and ride it. I could become “at one” with it. But I had to be attractive to it, and I had to be in position well ahead of it. Sure, I had to choose the right wave to ride, but I knew that there were always waves out there. Sometimes they present themselves only to dump early or never grow to anything decent. But you get out there, get in position, wait and pick your target. If you are truly at one with the waves, you will know how to ride them. If you haven’t come to that level of experience, then each time you try it you will learn from it. The secret is to be willling to invite that knowledge into your mind and learn & remember from it.
I’ve written articles on this subject at www.beunconstrained.com The thing is that we are never taught these fundamental realities. Waves are no different representations of cycles in the universe. Cycles occur naturally all around us. We can’t influence them - like waves we have to be “at one” with them. Cycles come in all sizes - electricity has positive and negative cycles, magnetics, etc. Weather comes in cycles, phases of the moon come in cycles, agriculture, etc.
And (drum roll please) so does money. Yes, there are cycles there too. Bull & Bear markets, for example. If a market is up (Bull market), you can easily predict that like any cycle it will be balanced out by a down market (Bear market). This is the law of the universe. No fancy math, quantitative easing, monetary policy, etc. can ever beat this. It might influence the timing of bull & bear markets artificially, but like the waves, you can’t fight them - you can’t attack them, you can’t hack them. They are there, as they have always been there since the dawn of time. And they will always be there for the future. In fact, and I have no actual scientific evidence for this, but having seen attempts to thwart nature, nature has a nasty habit of biting back and rectifying situations when it detects someone is trying to game the system.
If you understand cycles, you understand how to predict ahead. This is about time. Timing is everything. To pretend that you can just continue to buy in good and bad times, assumes a faith based agenda that doesn’t create cashflow. It might create some equity over a very long (ie. 20 year) period of time, but if you need to generate income on a regular basis, chances are that your life will look a heck of a lot different in 20 years than you expect. Health events, relationship changes, etc. may destroy your sense of what your future will be. That is not to say that you shouldn’t have a plan for 20 years ahead, but don’t beat yourself up too much if the future doesn’t look like you think it will.
What you should do is learn to read the markets like a surfer reads the waves. To position yourself in the best place for them, be as attractive to transactions and people as possible and be as fit and ready to paddle like crazy as soon as the opportunity presents itself to you. Then you are truly a Ninja at this - the more you do it, the better you get. Eventually, like a master surfer, it becomes second nature to you and that’s when you know you are rich. Rich not just in money, but you have learned the art of buying the right goose and getting the eggs.
Enough with the analogies
So I’m going to throw around some numbers here, but they are general concepts - you will have your own personal numbers and you need to realize that your decisions in what you invest in are yours and yours alone. I’m not going to tell you to buy this or buy that, or that if you invested in X you will be rich in Y years. That’s stupid, and I don’t know your personal situation so I have no idea what your future will look like. But I can tell you some general numbers so you might want to see if something like that is attractive to you, and if so you can pursue it in any manner that makes sense for you. Remember, you own yourself and you own your decisions.
OK, I alluded before to some magic number you need to make each month. You should, by now, have an accounting system setup to know your numbers. You should be able to track your expenses, and you should know that you want the lowest burn rate possible. You may have had to adjust things in your expenses to ensure that - sell anything you don’t absolutely need, or that doesn’t serve you. Write off past decisions as learning experiences, and clear your plate for the future. The lowest burn rate is best equipped for this.
Let’s say you need to make $5K per month to live comfortably. You change the number according to a reasonable life need you have. Then multiply that number by 12 to get a yearly number. So the $5K is $60K per year. But we are going to work on monthly because it is easier to follow.
You need to generate $5K of income each month without having to spend a lot of hours to do it. Maybe you are willing to spend a huge amount of time up front to establish the assets so that you can generate that money over time in the future. And you have a job right now, so you can do this outside of work and eventually move out of your job once this takes hold. That’s a good and conservative approach. But if you don’t have a job, and have a very low burn rate, then you can accellerate this like a race car driver. I’m not advocating you quit your job to do this, but you get back what you put into it. So you do you, and find the best fit for you and your family’s situation.
The easiest and quickest way to make $5K per month of cashflow is with real estate. But there are plenty of other (and often better) ways to do it, but rental real estate is the easiest one to demonstrate the numbers. And these numbers will vary by locality and economic region, so there is no “one size fits all here”.
If you own a single family home, you can typically rent it for about 8-10% of its value. So a $250K home in the right market would rent for about $2.2K per month. You can buy a $250K home with a 20% down payment if you shop around for the right lenders. Your mortgage on that home is going to be (and this will change based on current market interest rates, etc.) let’s say with a 15 year P&I mortgage, about $1680 per month (I just ran this through www.bankrate.com as a test). This includes property taxes, insurances, etc. So if you had no repair bills, and 100% occupancy, you would make about $500 a month in profit.
But if you wanted to fine tune this a bit, what if you bought an 4 plex (four units in one building) and you could generate $800 a month per unit, for a $300K investment? The payment goes up to $2K per month, and now you are seeing $1K per month of profit. It will cost you $60K to buy in to start, but $1K per month. And the level of effort to deal with tenants, fix the roof, etc. is leveraged across multiple units, so your overall costs are lower.
If you had 5 of those buildings, you have $5K. But you also have tax depreciation as well, which means that if you have other income, the depreciation benefits from this will reduce your outgoing taxes on other income, meaning you could probably see another 3% of income over the capital value of the buildings. So 5 x $300K = $1.5 million, generating a 3% tax deduction, giving you an annual tax deduction of $45,000. If you are in the 20% tax bracket, for example, that is a $9,000 check in your pocket by way of money you would NOT be paying out in taxes. Divide that $9K by 12 to get the additional monthly income and that comes to an extra $750 in your pocket per month. So there is $5,750 per month of income, but requires $300K of your money to get going. $300K is WAY better than the $1.7 million the so called experts are telling you that you need to have for retirement.
But here’s where getting rich comes in. I’ve based all of my numbers here on a 15 year mortgage. Your tenants are paying off your properties for you. In 15 years time, your properties will be worth more than now (likely - no guarantee), and if you wanted to sell them, you could. But why would you? They are the goose laying the eggs, right?
However there won’t be a mortgage in 15 years. That means you will go from $5,750 per month of income to a massive $16,000 per month because you had the tenants pay off your mortgages for you. You could accelerate that by continuing to work longer, and putting the full extra revenue into the property principal payments, thereby reducing the length of the mortgage.
And the property is going to be worth much more. That means you are owning an ever increasing valued asset. Finally the rents will go up with inflation too, so there is some protection to changes in general economy situation.
This is just one scenario. Yes, there are many factors that will make it less or more attractive based on your region, your decisions, how good an “operator” you are as a landlord, etc. But it is very simple math. Sure, the devil is in the details, but I’ve used this method to provide income for now and for the future for my family for decades. It has worked well for me - sometimes better than others, but generally pretty good.
You don’t need a retirement fund if you have a $16,000 per month income coming in. Because it services your cashflow needs for the future. Maybe you get sick of dealing with tenants and you want to take it easy and not do that. OK, with this level of income, you can hand it over to a property manager who will probably charge you somewhere around 10% of the rents to do it, but you are now 100% hands off. You still get the revenue.
There are many other ways to do it. You look for similar asset classes that do this. Some have higher risk than others, but it sure would be easier to just start focusing on investing $50-60K to get started with real estate investing now. I mean if you have a $75K a year salary and you get your burn rate down to the minimum, you can save money and build this up. Or you may already have savings you can afford to invest in something like this. Just don’t do it if it would reduce your emergency savings account. You need protection, particularly in times when jobs are in jeapordy due to looming recessions, etc.
Also timing matters. You might be able to find the same properties for 75% of the “normal” price if there is a recession out there. Existing owners fall on hard times and need to sell fast. That’s when a prepared investor generates the best returns. You make your mone when you buy because if you are buying geese that you never intend to sell, your best opportunity to make money on the equity value of the asset comes at the purchase.
Like the surfer, you are forever surveying the waves. You are looking to choose the right one to expel energy to ride. There are always waves out there. Most are not the waves you want. Maybe you have a great circle of friends, associates, etc. that can tell you where the best surf is. Maybe you have some edge in determing this. You need to get out there and look though. Because it could ride simply on whether the market where you are looking has adequate employment that brings in workers that need to rent accomodation and that means they want to rent your place. If you have a high vacancy rate, then you reduce your income, and there isn’t much wiggle room here. A good economy benefits you once your rental property portfolio is established, but it is your enemy when you are looking to acquire the assets. Also the interest rates for money have major impact on your cashflow, so you want to survey markets, etc. There’s a lot of research needed here, but it is no different to the surfer that chooses the right beach to surf, the right places, the right waves to catch.
I’m going to challenge you with different asset classes and what might lead to income. Some are easier to get into than others. Some require more time investment, some are more conservative and some are riskier. You do you. You choose what suits your pallette in terms of risk/reward, and know that all investments have some risk.
Again, I don’t know your personal situation. So I won’t advise you on specifics. My goal here is to help you train your brain to be open to opportunities due to the daily habits you need to attract the opportunities and the people with them.
With a smart income per month that exceeds your burn rate, you are unconstrained. At least from a financial perspective. Isn’t that the goal of any retiree? Don’t they just want a monthly income that is guaranteed that exceeds their spending? Do they reduce their spending down to make it work? You don’t have to be 65 or 70 years old to do this. You can start now, and then you can take the entire word “retirement” out of your vocabulary because you have an income stream that can support your daily needs and you don’t need to sell your time to anyone to make it.
That’s the secret. Most of us spend all of our lives working for someone else. Making them rich. The day you no longer can do that is the day you are fired. We never recognize that wealth takes time. We never set ourselves on a path to be able to make real wealth. We literally waste our time - our one and only life - feeling like we are in service of others. It is a scam. We are making others rich at our expense. If we had a way to sustain ourselves - to get through each month without loss, but to apply our time in pursuit of our own investments and our own life altering experiences, we would be happier, more successful and more influential. But we don’t. We settle for a life that is told to us by the rich, so that we can be the worker ants and make them richer. It is time for you to stop this. Smart Income is, in my opinion, the only way you will achieve it.
The stock market is a setup by the rich to steal your wealth. The government is not going to be there to save you. Do you think that the rich care if the govt provides social security or free healthcare? No, because they can afford whatever they need and they go where they are treated best. If you can’t at least learn from observing this, then you are forever constrained. Stop the insanity now.
Until next time, keep fighting the good fight.