Blog | Personal Finance

Here’s Why You Need Passive Income to be Financial Free

During hard economic times, it’s really easy to identify the vast differences between investors. Despite honest efforts, not all investments are wise.

Today, some investors who rely on things like retirement might be hurting because their retirement isn’t doing as great as they had hoped. Others, like those who’ve discovered ways to earn passive income with things like real estate, however, are thriving.

The cash flow pattern of the rich

Take a look at the image below:

The poor live paycheck to paycheck to survive, and the middle class pour their money into liabilities. The rich however, as shown above, obtain their income from their investments - as opposed to a salary - to pay for their liabilities.

What’s the main difference? The rich have money coming in monthly in the form of passive income.

What exactly is passive income?

In short, passive income is a type of income in which money is generated on a recurring basis with little to no effort.

If you take a look at our CASHFLOW Quadrant, you’ll see there are 4 types of “money-makers” out there:

• Employee - Employees exchange their time and effort for income, and their security is 100% at the hands of their employer despite their contribution. If they don’t work, they have no income.

• Self-Employed - The self-employed work for themselves, and may eventually see the fruits of their labor. Still, flexibility and freedom are not always within arm’s reach, and security still relies on others.

• Business Owner - Business owners generate passive income. They see direct results of their time and effort, and income doesn’t rely on active work. It’s likely that one day, business owners also have employees working to generate their income for them.

• Investor - Finally, investors are letting their money work for them. They invest in assets that generate passive income that will ultimately generate more cash flow.

Robert and I have a real estate friend that lands on the right side of this quadrant. She has several properties, of which she earns consistent rent - a.k.a passive income - every month, while enjoying tax benefits and true freedom. Just like the investment pattern above, her assets cover her monthly expenses, and her income remains consistent.

How to use real estate to generate passive income

There are several ways to generate passive income, from stocks to owning a self-sustaining business. For Robert and me, real estate is our preferred method of generating passive income.

What we’ve discovered is that the key to being successful is to charge enough rent to cover expenses. The more properties you have with this mindset, the more passive income you’ll generate.

Additionally, we’re not interested in capital gains. What that means is, we don’t like relying on the market to determine if we’re going to generate cash flow or not. Instead of buying and selling properties, we buy and rent, typically long-term leases, and have a guaranteed flow of income every month.

Get clear on your ROI

Understanding your return on investment is critical in being successful. As I mentioned above, we know that the rent we charge needs to also cover the expenses associated with each property. That means we’ve already calculated what our return on investment needs to be in order to have steady cash flow.

In short: smarter investments = higher ROI.

The whole reasoning behind developing passive income, is that you want your money working hard for you so that you don’t have to work hard for your money.

Calculating your ROI

The Annual cash flow / Amount of cash invested = Cash-on-cash return on investment.

For example, let’s assume you’re buying a rental property that costs $100,000 using a 20 percent down payment of $20,000. Each month your property cash flows $200. That’s an annual cash flow of $2,400. To calculate your cash-on-cash return would look like this:

$2,400 / $20,000 = 12% cash-on-cash ROI

Not a bad return, but not stellar either.

Let’s take a look at another example. Say your purchase $2,500 in stock that pays an annual dividend of $100.

$100 / $2,500 = 4%

Well, at least you’re getting a return.

The point of showing the two examples, a rental property and a stock investment, is to illustrate that not all investments are created equal.

If you have an investment making 4 percent ROI for you, then it’s not working very hard. If you have one making you 50 percent ROI, well then you have a real team member.

Time is money

Nothing energizes me more than meeting women who are ready to start new ways of getting rich. But for every woman I meet who is ready to get started, there’s another one who offers the excuse, “I don’t have enough time.”

For most of us, this statement probably rings true. We feel we don’t have enough hours in our day to accomplish everything we want. We have full-time careers, a spouse or relationship, even children, plus additional day-to-day activities. The thought of adding another thing, even something as important working towards financial freedom, seems overwhelming.

This is where passive income comes in; the rich know how to use money, to generate time the way they generate wealth.

Make money work for you

The key to success is not to work for money, but to make money work for you. The great thing about passive income is that it also generates time; you can be earning money even while you sleep. So instead of working late at the office, your real estate property will supply you with extra cash. Instead of getting another job, the business you started by selling online will generate extra income.

The rich don’t use the extra time they generate being lazy or accumulating liabilities. They use their time to create more free time in the future. They use the cash flow from one investment to invest in another, building on their wealth.

This is what it means to be financially free.

Getting started

Now that you’re ready to start investing for passive income, it’s time to get financially literate. We have so many resources available to you once you’ve determined how you want to make your money. We have classes, coaches, and free education available for you at your fingertips.

Remember, we all have the same 24 hours every day. How you use those hours determines not only your financial status, but also your future.