I’m with you. Enough already about how great passive income is and how we should all be earning more of it! Because I’m constantly mulling things over, today I dedicated some thought to how passive income provides freedom.
Most of the time people talk about how that freedom is the ability to quit working for an employer and start enjoying life more. Since I haven’t been able to set up enough streams of passive income to pull that off, I’m thinking a little more along the lines of how passive income would permit me to pursue forms of investment that might be too risky for me presently given the shortage of “extra” money.
One great tactic for growing rich is to maintain conservative consumption habits, even in the face of large increases in income. A guy making $50,000 per year has a standard of living that he has grown accustomed to. Even if he is consuming at a very high rate relative to his salary, once he receives a raise, he can increase his savings without affecting his lifestyle if he will simply maintain his previous level of consumption. Most people are unable to do that for some reason, so no raise is ever big enough to appreciably increase their savings because they’re too busy increasing their standard of living.
Passive income can give you “extra” money each month for investing in opportunities that were previously too risky or required more capital than you had available. I’m not suggesting that passive income shouldn’t be carefully saved or invested, but it does open up new avenues of opportunity.
My wife and I are interested in investing in real estate. We consider one of the biggest risks to be vacancy which would result in our having to pay the mortgage (instead of the renters). Since we’re pretty early in our careers, we haven’t accumulated nearly as much as we’d like to, so an unrented property could pretty quickly sink our financial ship.
But if we created a stream of passive income generating $1,000 per month and didn’t increase our consumption, we could purchase an investment property with monthly costs of $1,000 and know that the mortgage would always be paid. During the months where we had a renter, we could put the passive income into a savings account for unexpected repairs or a down payment on another property.
Unfortunately I still haven’t found any great sources of passive income, or rather, I haven’t effectively created any streams of passive income . . . yet. That is a goal of mine, so I’ll continue researching and trying available options until I succeed.
If you’re fortunate enough to have so much passive income that you can retire early or just tell your employer to shove off, great! The rest of us will probably earn smaller amounts of passive income, and the best way for us to use it is to apply it to other investments: retirement, starting our own business, or better yet, creating other (bigger) forms of passive income.
Question(s) of the day:
How would you use passive income if you had more of it? What have been your best sources of dependable passive income?