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7 Reasons to Generate Passive Income With Stocks

An educated stock investor knows how to cash flow with the stock market, not just invest for capital gains

Summary

• Capital gains isn’t the only way to generate income with stocks

• Don’t rely on the dreams of a retirement nest egg, cash flow ALWAYS beats savings

• Stocks offer a flexible, low barrier path–when done right

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When we think of retirement, most people imagine the day when they no longer need to go to that job anymore. It usually occurs somewhere around the age of 65. By that time, hopefully enough money has been saved to carry them through the retirement years.

But for many people, retirement may never come. Some are unable to acquire enough money to cover their expenses for their remaining days; and even if they did, soaring inflation could make their savings too small.

Cash flow: the key to retirement

The beauty of using cash flow to retire is that it grows with inflation. It also does not require a big nest egg. Instead, it requires assets that produce regular income. So instead of saving millions of dollars in hopes that it is enough, one would create or buy assets that create enough income to cover all their monthly expenses.

When we talk of cash flow, most people think of rent. If your monthly expenses were $5,000 you would need enough rental apartments to generate $5,000 a month. Doesn’t that sound easier and faster than building up a huge nest egg?

When people consider investing in the stock market, they typically think of long-term retirement accounts or other buy-and-hold scenarios. Rarely do they think of the stock market as a source of ongoing cash flow. Yet that’s exactly what it can do for an educated investor.

Becoming an educated investor

An educated stock investor knows how to cash flow with the stock market, not just invest for capital gains.

“The mutual fund industry has brainwashed us into thinking about investing,” says Andy Tanner, stock expert and Rich Dad advisor.

Be patient… stay the course… don’t panic… you’re in this for the long haul.

When we hear this advice, it conjures up an image of a wise old man like Benjamin Franklin endorsing this time-honored tradition of investing. One can imagine people just like us investing this way for centuries.

On the other hand, how does our culture represent stock market traders? They are typically shown as greedy, high-risk gamblers who will do anything for a quick buck.

“In my opinion,” Andy continues, “both of these pictures are false. The first one is meant to lull us into false comfort, and the second to shame us into believing that’s what we will become if we trade the market for ourselves.

I like to think about investing the same way I think about business. Some people work as employees, and some people build their own businesses as entrepreneurs.”

The “employee” type of investor is the one who invests in cookie-cutter investments such as mutual funds and 401(k)s. With no thinking involved, they can just do their thing and enjoy life. Later, when they look back, they often have regrets and wish they would have taken charge of the situation to generate greater returns and satisfaction.

The “entrepreneur” investor, on the other hand, looks at the investment possibilities before him and sees endless opportunity. They may not know how to do it all right now, but they have the confidence to figure it out. Why? Because they see other average people who have succeeded at it, and they are at least equally as smart. So they focus on improving their education and then putting this new training to work in the real world. Sometimes they win, sometimes they lose. But they are learning from their mistakes at every step, and discovering ways to avoid making them again. As time goes on, confidence builds, and profits grow.

Just like the entrepreneur who starts a new business and builds it over a period of time, the stock market entrepreneur grows their own money-making effort.

7 reasons to use the stock market to create your cash flow

• Reason #1 – You can start small. Perhaps the most attractive aspect of stock market investing is that it allows anyone to start small and scale up when you’re ready. Plus, you can get up and running in a short period of time.

  Starting a business or becoming a real estate investor are also great ways to help you escape the Rat Race. But they usually require a large amount of money to get started. And they also require you to invest a big chunk of time before they begin paying you back. With stocks, you have very little overhead and can start with very little money. Then you can scale it up as you grow.

• Reason #2 – Flexible. When you invest in stocks, however, you can still get started while working a regular job and learning to invest by practicing in your spare time, because we’re NOT talking about day trading or those other risky types of stock investing that force you to be glued to your computer screen. Take Andy’s style of stock investing, for example. It allows someone to get up early and put in a bit of time before they head out to work. Others prefer doing it after they get home in the evening. Since you don’t have to interact with people as you do with a business or real estate, it’s easy to fit it to your own schedule.

• Reason #3 – No people skills required. With other types of business and investing, some people get nervous because they don’t have the sales skills necessary to succeed. You don’t need that as a stock market investor. Anyone with average intelligence and a desire to learn can gain the right skills and strategies used by successful investors.

• Reason #4 – Liquidity. The liquidity of the stock market means that there are always buyers and sellers ready to act. You only need to learn how to set up your investments to benefit no matter if the market moves up, down, or sideways like top investors you hear about in the news all the time.

• Reason #5 – Leverage. To gain leverage in business or real estate, an investor needs to take on debt. This isn’t a bad thing, but it can sometimes limit your ability to play in those arenas. In the stock market, you can have tremendous leverage through the use of option contracts. These types of option contracts allow you to control large amounts of stock positions for pennies on the dollar. It can be a huge advantage for the educated investor who knows how to safely use options for steady cash flow.

• Reason #6 – Agility. If the real estate market plunges or the economy goes into recession, there is instantly a lack of buyers and your cash flow can dry up instantly. With stocks, however, there is always opportunity – no matter if the market plunges like it has in the past, or if it spikes higher, or even goes in a boring sideways direction. That’s what is the definition of agility when it comes to stocks: the ability to profit in any situation you face.

• Reason #7 – Free practice. One of the best aspects of stock investing is that you can learn how to do it without risking a single penny in a bad trade. Virtually all brokerage firms offer anyone a free account to sign up and learn to trade. It works just as if you had real money in your account — but it’s basically ‘pretend’ money. This is an ideal way to practice the strategies and skills you learn through a proper training program. Name another type of investment that gives you this type of sandbox to play in and hone your skills.

How to cash flow stocks

Here’s what a typical investing move looks like for Andy on an average day. It’s a basic strategy called “a covered call.” Let’s say he finds a stock that he wants to buy at $100, and he’s willing to sell it when it reaches $105. So he decides to go for it and purchases the stock

That’s where an amateur investor would be finished with the investment. Just buy it at $100 and hope the price goes up.

For this example, however, we’re just getting started. With the stock in Andy’s account, the next thing he’ll do is sell a one-month option to another investor that allows her to buy the stock at $105, even if the stock jumps much higher than that. Here, let’s say that the going price for this option is $5. So Andy sells the option for $5 and pockets that money — it’s all his. And during that month, she can exercise the option at any time to buy the stock at $105. If she doesn’t then he keeps the stock. And he always keeps the $5 she paid for that option.

At this point, one of three things will happen:

1. The price of the stock could go down – If this happens, Andy will continue to sell options every month to collect ‘rent’ on his stock. Think of it like a house that you rent out. It doesn’t matter how much the house is worth, there will always be people willing to rent it.

2. The price of the stock could go up – If it does, then Andy will sell the stock at a profit.

3. The price of the stock could stay about the same – Similar to the price going down, Andy can continue selling options to collect rent.

That’s a very simple approach, in which investors can learn how to do it properly– with profit–in very little time.

The goal

At the end of the day, it’s true that money cannot buy happiness. But in our quest to give ourselves the kind of lifestyle we desire now and a retirement that we deserve after a lifetime of hard work, money can be the difference between truly enjoying all of the wonderful things that life has to offer and continuing to work just to survive.

In Rich Dad philosophy, the goal is simple: get enough cash flow to cover your expenses. Once that is achieved you are financially free.

While some people use real estate and others use business to achieve this goal, now you know that you can also achieve that goal through the stock market.