What’s the best use of passive income? After writing my most recent post, I continued to think about this specific question.
Too many people have multiple sources of consumer debt: car loans, several credit cards with balances, student loans, home equity lines of credit, etc. Paying off debt by making only the minimum monthly payments will take an inordinate amount of time because interest absorbs the majority of each payment.
Personal finance pundits talk incessantly about the idea of a “debt snowball.” The basic concept this:
- Stop the bleeding – quit incurring new debt and increasing current debt.
- Instead of making minimum monthly payments on your various forms of debt, find, save, or earn a little extra money so you can pay down one of the debts.
- Once the first debt is paid off, redirect that monthly payment (from the paid-off debt) to another which will allow you to knock it off more quickly.
- Repeat the process, and each time the monthly payment will grow and each debt will be paid down at a faster rate.
To complete the thought, there are at least two schools of thought regarding the order of attack: some advocate paying off the debts starting with the highest interest rate and working down (in order to minimize the total interest paid) while others recommend paying off the debt with the lowest amount owed and working up (in order to quickly free up “extra” money for paying off the other debts and maximize the perception of progress).
If the “snowball” works so well for eliminating debt, why not apply the approach to passive income? Instead of consuming at an increased rate after establishing a stream of passive income, roll that new income in other passive income ventures. Once each new venture becomes self-sustaining, it will contribute to a snowball that can be reinvested in the next opportunity. The available money will increase with each iteration, and so consequently will the new possibilities.
Eventually you may reach a point where you do actually achieve freedom that allows you to quit your full time job (if you have one).
The nice part about this method of reinvestment is that even smaller streams of passive income — when combined — can produce an appreciable monthly revenue. If it truly is passive income, once the system is in place, it requires no additional time and will facilitate (not prevent) the pursuit of more passive income.
Robert Kiyosaki advocates investing in assets, which by his definition are things that make (not cost) you money each month. A car and primary residence are not assets per Kiyosaki, whereas a vending machine or investment property would be.
Many people complain that it takes money to make money which is sometimes — but not always — true. Often potential entrepreneurs get hung up on thinking they can’t afford something when they would do well to ask themselves Kiyosaki’s question, “How can I afford it?” What streams of passive income can I establish to allow me to build up to (and ultimately finance) the other opportunities that I really want to pursue?
After establishing your first stream, a fun challenge presents itself: in what order will you attack potential future sources of passive income?
There are as many “right” ways as there are entrepreneurs seeking them. One person may want to start small so she can dabble in her spare time and continue her employment. After getting a couple of smaller ventures under her belt, she will build up to larger, more complex opportunities.
Someone else might be in between jobs and decide to swing for the fences and avoid going back to working for “the man.” He’ll have one main source of income and later round it out with a complement of other smaller ventures.
Not all the money from passive income has to be dedicated to future investments. If you’re on the right track financially, what good is your money if you don’t use it to enjoy a little of what life has to offer?
Question(s) of the day:
Do you have the self control to reinvest your passive income? How would you decide which form of passive income to pursue first?