Cash Flow is King: Increasing your income through passive investments.

Date: 2019-09-03

Time to Read: 4 Minutes

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Category #5 - Passive Investments/Income Producing Assets

Unlike the previous two categories where the hours worked-income earned ratio can vary wildly. This category seeks to completely minimize the hours worked side of the ratio. The entire goal of this category is to provide an option to invest your money in an investment that produces enough dividends that it can effectively fund or partially fund your lifestyle without requiring your active involvement in the investment themselves. You may argue that this is also the goal of some variations of the approaches discussed in the previous “Business” category (building your business to a point that it operates without your involvement). You’d be correct. It’s pretty obvious that the borders between the different categories can become blurred with different specific cases.

However, when I describe this category, I think more-so about buy-and-hold investment strategies. Whereas the other categories typically concern with the production of value and income from a consumer service or product; this is the category that your excess margin of earnings should be funneled into so as to compound and create more possibilities for passive income. Excuse the buzzword.

The two most popular strategies that are often discussed in financial independence circles are:

  • Long-term Passive Index Fund/Equities Investing with dividend payouts or simply living off of a consistent withdrawal rate.

    • This is incredibly hands-off and passive in nature aside from occasionally re-balancing your allocations and managing your contributions/withdrawals (which can be automated in many cases). More information on this strategy can be found at JL Collins’ Simple Path to Wealth.
    • There are also many tax-advantaged investment account options available depending on your employment status (SEP-IRA, 401k/403b), income level (Roth/Traditional IRA), and even health insurance plan (HSA). Additionally, you can also open an old fashion brokerage account for additional investing. I discuss some of these investment account options in more detail in my post, A Goal-Agnostic Strategy to Personal Finance.
    • You can also simply focus on building a portfolio of high dividend producing securities to provide a fairly consistent source of income, a strategy explored by the blog, Dividend Diplomats.
  • Buy-and-Hold Rental Real Estate Investing

    • A lot of people may argue that between actively seeking good real estate deals which cash flow enough to warrant the investment, any rehab/repair costs, and everything that goes along with managing tenants; that rental real estate investing is the furthest thing from a passive income investment. Therefore to truly make this a passive investment, you would need to assemble a team to help you through the workflow of finding viable deals, facilitate the financing, contracting repairs and also a property manager to handle tenant issues and vacancy problems.
    • Despite these concerns, real estate investing is a very popular wealth-building strategy and rental real estate is considered a passive income source since you are generating revenue from an investment that you are not actively involved in the operation of.
    • Another reason why real estate is a popular choice is the many tax advantage opportunities presented by real estate which can be explained in further detail here: Coach Carson’s Tax Benefits of Real Estate Investing.
    • And another incredibly valuable resource for more information on the entire enterprise of real estate investing is BiggerPockets.
  • Other strategies in this category include becoming a hard money/private lender to other investors and consumers.

Well, there it is. The five areas/categories of income production that can be leveraged toward the cumulative goal of increasing the income earned component of the cash flow equation.

  • (1) Increasing your income through your primary job.
  • (2) Increasing your income through an additional job or service.
  • (3) Increasing your income by building and monetizing your brand and information provided.
  • (4) Increasing your income by starting a business.
  • (5) Increasing your income by investing in passive income-producing assets.

You can choose one, two, or all of them. In different ways, the strategies within each category share common characteristics and can also be argued to belong to a different category from the one that they’re listed under.

Different strategies can work in tandem for the benefit of each which provides an ideal heuristic when weighing possible actions to perform such as:

  • Your primary job (1) may allow you opportunities to learn different skill sets or build possible networks that could provide a client base for future consultation services (2).
  • Your success in freelancing (2), business (4), or passive investing (5) may provide content to draw attention and traffic to your personal brand, website, channel, or podcast (3).
  • Your audience from your personal brand (3) allows you to market your service (2) or business (4) much easier than simply starting from scratch.

These are just a few examples of how success in one strategy can drive success in another. Going forward, I hope to have more in-depth posts describing my own experience in these individual categories that I can share in a helpful manner so that you can replicate any success that I have or avoid any failure that I encounter.

Cash Flow is King

03 September, 2019
I dive into the different strategies to optimize your personal cash flow equation which includes reducing expenses and a multi-faceted approach to earning more.
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About

Blake Adams is a writer, software developer, technical consultant, and financial independence enthusiast living in Oxford, MS.

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