Most of us are very familiar with earned income these days. We have a job where we have to put in X amount of work to earn X amount of dollars. Then, we save a small portion of each check into an investment account so we can retire when we’re in our late sixties. It’s the common plan, and most people don’t think twice about it (even though it’s not really working that well today).
So what’s the alternative? Passive income. By working on a certain task today, you may ensure yourself a paycheck for the rest of your life, even though you don’t continually work for it. This is the basis of passive income. I realize that the explanation might still leave you puzzled, so let’s take a look at an example. A song writer comes up with a great piece that is purchased and sung over and over for the next 20 years. Each time the rights to the song are purchased, the writer gets a cut of the profits, but they only had to write the song once. This is passive income in a nutshell.
So How Can Passive Income Lead to an Early Retirement?
There are many different forms of passive income: real estate, selling insurance, network marketing, franchising, and even dividends. As long as you develop a system and are able to take yourself out of the business, anything could potentially be a source of passive income!
The real question though, is “How could it lead to an early retirement?”
Let’s imagine that you save up your pennies and you’re able to buy your very first rental property with cash! You find a renter immediately and are earning $750 a month on your $80,000 investment. With your regular savings of $1,500 a month and your additional $750 from rent, you soon find that you’ve earned another $80,000 after only 3 years!
Since the first real estate investment worked out so well, you’ve decided to purchase another property and rent that one out as well. Now your rental income is $1,500 plus your regular savings of $1,500 per month – this allows you to save at a rate of $3,000 a month! It will take you just over 2 years to buy a rental property this time, and then your income will be $3,750 per month.
If you have 20 years before retirement and you institute this passive income mentality, you could create a regenerative income that’s beyond your wildest dreams! You might not have $2,000,000 sitting in a 401(k), but you will have over a million dollars in assets, plus you’ll have an income that’s $100,000 per month! I would take that scenario over a slightly larger chunk of money any day.
What Is Your Plan?
If you’re nearing retirement, hopefully you’ve had a plan in the works for a while. If you are still young, I would encourage you to develop a passive income any way that you can. If you have any questions about what might be possible, be sure to send me an email. I would love to help in any way that I can.
(This guest post has been written by Derek from Creating a Passive Income. Not only does Derek enjoy writing about passive income, but he also makes an effort to create it in his every day life! Be sure to subscribe to his website if you’d like to discover some new forms of passive income that you’ve never thought of before!)
I agree that passive income is great way to make much more money. It is very satisfying getting that money coming in knowing you are doing very little to keep that stream going. It sure beats hourly paid work where you get nothing extra from that effort.
Modest Money recently posted..The Financial Burden of Moving (and Breaking Up)
Most of the time, it sucks up front because you’re getting paid practically nothing for all of your work. But, later in life, it sure is sweet!
Derek recently posted..Passive Income with Student Housing
I used to own rental properties and I would never call my involvement passive. I was very active in the day to day activities. I do like multiple income streams because there are always things that change.
krantcents recently posted..The 3 F’s of Success
Yep, if you don’t want to pay for a management company, chances are that your income will not be very passive. But, it still beats a 40 hour week at the office!
Derek recently posted..Passive Income with Student Housing
I learned about passive income back in college and have been making it my mission to get enough passive income to live comfortably. I am in the process of renting out my first property. I’m super excited fixing up the house and the process of renting it out. Hopefully things go smoothly enough and in a few years, I’ll be adding some more properties.
MoneySmartGuides recently posted..The Round Table
That’s awesome! Good luck on the property rental. That is pretty exciting!
Derek recently posted..Passive Income with Student Housing
Passive income is very important to retiring early. It’s difficult to save up enough cash that will pay you an income stream that you cannot outlive.
However, by building different sources of passive income, you can increase your earnings today and develop an income stream down the road to help supplement any other savings you have!
WorkSaveLive recently posted..Understanding Taxes: Tax Deductions
Very true! And who really knows how to live off from a large pot of money that’s just keeps depleating? Nobody!
Derek recently posted..Passive Income with Student Housing
The most passive income is of course, investment returns (Dividends). Beyond that, there’s some level of active-ness in most things. I have online blog activities and sell a few custom items on ebay. I still consider it passive because of the element of time. In my opinion, if your income vehicle allows you to maintain it on a frequency of your choosing, it s a strong consideration for passiveness.
BE @ BusyExecutiveMoneyBlog recently posted..3 Easy Steps to Living Below Your Means
Yep. There are only a handful of truly passive income streams, but there are thousands of semi-passive ventures! And I consider semi-passive to be worlds better than an hourly salary!
Derek recently posted..Passive Income with Student Housing
Side income is probably a more apt description, but while it might not lead to “retirement” in the sense of not having to work, it definitely can in the sense of exiting the corporate rat race. Great stuff
Financial God recently posted..A Frugal Manifesto
Ahh yes, exiting the rat race – the dream of many, but actioned by few. Passive income would certainly get you out. It could take a little bit of time, but I bet it’s 100% worth it!
Derek recently posted..Passive Income with Student Housing
This falls under the category, “Things That Should Be Taught In High School.” We recently wrote about a client of ours; very related: http://in-the-flow.com/beneath-the-spreadsheet-2/
Jim Campbell recently posted..Comment on Contact by Begin With The End In Mind | In-The-Flow
They really should teach this stuff in high school! I know I would have been paying attention!
Derek recently posted..Passive Income with Student Housing
Important to diversify your income streams since you never know when the water will run dry on any one of your endeavors. Great reminder to keep at it.
Re: the Rental income, good idea to have several months of savings in case you can’t rent the apartment or your tenants trash the place.
Brent Pittman recently posted..Do You Pick Your Lent?