It doesn’t matter if you’re a corporation, an entrepreneur, or an investor. Income streams and multiple streams of income are far, far more important than having just a lake of money. Let me explain.
Companies sell products. Let’s take Apple, for example. Apple sells different types of products, right? iPhone, iPad, computers, Apple TV, the Apple Pods, those little Q-tip things that look like they’re earphones in your ear. All of these products generate income streams. Each is its own little business, if you will. And each of those products has multiple buyers, hundreds, millions of buyers across the world. If one of those products starts to dry up, Apple has the ability to move into new products, but also has the ability to continue and sustain its revenue because of the different streams of income.
So companies always have different business lines, if you want to call it that. They always have different ways in how they’re making their money through products and in customers. If you’re an entrepreneur and your entire business is, let’s say, affiliate marketing, you can potentially live from just marketing one product.However we know times change, technology changes, people’s interests change, so you need to have different products that you affiliate marketing over time. This is the way that affiliate marketers will be able to generate and sustain a lifestyle through different types of income streams.
So how do we apply this to investors? Right? And as an investor, you and I are seeking to generate income streams rather than just a big pool of money. Let’s first talk about that premise, right? Why is an income stream better than a pool of money?
Traditional retirement plans, government pensions, IRAs, 401ks, first pillar, second pillar, all of these superannuation plans, they’re all based upon the premise that what we should do is save a massive chunk of money. To be financially independent, ready to retire, most people recommend 25 times your annual salary as an income stream, or as a pool of money.
So if you have $100,000.00 Of expenses every year, you need to have $2.5 million in your pool of income to be able to be financially independent and live for the rest of your life.
Now they calculate this 25X rule on a couple couple items.
First is that you take a 4% withdrawal rate. So what to you’re going to do is you’re going to take your $2.5 million, you’re going to multiply it times 4%, and that’s going to be the amount that you can live on every year for the rest of your life.
The other thing is that your income in that pool will grow. It will continue to increase in value at a rate that exceeds inflation. That rate is really based upon the stock market index, and they’re assuming it’s going to be a 7% increase every year. Thus, by you drawing down on 4% in drinking from that pool of money, it should last indefinitely.
Now we all know that’s not true, right? Let’s put the facts on the table. In some years, certainly in 2007, ’08, and ’09 when we went through this massive economic recession, there were stories all over the news of people, retirees, that had to go get other jobs because their entire retirement funds dried up. They lost 50% or more of the value in their retirement funds. If you read my blog posts, you’d see it took 10 years for us to come back to even. So if you’re a retiree and you need that 4% of your funds to live on each year, and you had $2.5 million in value, you’re down to $1.25 million, that 4% that you were taking out before, you just sucked out a lot of money from your pool, and even after 10 years it’s not back up to where it was. You’ve actually lost your net worth. You’re now in financial destitute situations.
So what I really like to do is have multiple streams of income, not rely upon the old analogy of having a pool of income. Why is that? Well, if you’re doing this whilst you’re working still, then those streams of income feed into that pool and it continues to grow your net worth. If you get unemployed, you get laid off, or you actually decide to become financially independent and stop working for a bit, you want to take a year off to take care of the kids or a loved one, you can do that. And you can live from the streams of income without ever having to touch your entire net worth in the pool that you’ve built up. I do this through what I call real estate multifamily syndications.
Now let’s say with multifamily syndications, you have 10 investments you’ve made, so that’s 10 different apartment complexes that you’ve invested in, you’re going to get checks from each of these investment syndications every month. If you’re working, those 10 checks go into your bank account and they grow your net worth. You can then redeploy that net worth into turning it into an 11th investment, right? And that’s how you grow, and grow, and compound your net worth.
If you need some of that net worth, you want to take an extravagant vacation … Sure, do it. Take one or two of those investment streams for a month or two. Take that money, go take a nice vacation. No Loss. When you come back, go back to work and continue to invest. You’ve not touched any of your net worth. You continue to grow it. You’ve continued on your journey of financial independence. That’s the way I like to do it. This is why multiple streams of income make a lot more sense than just focusing on the big pool of retirement funds that one day you’re going to start to drink from.
In summary, a pool of retirement funds, 25X your annual expenses, that’s a nice target. But it’s not the right way to focus on achieving financial independence. Again, it’s subject to market fluctuations, which are completely emotional, right? Secondly, drinking from your money and hoping you don’t outlive your money, that’s not the right mentality for me. Living on 4% of my income, or 4% of my nest egg every year, just doesn’t to me feel the right way to live. Thirdly, if we think of generational wealth, wanting to really make an impact for our kids for the causes we care about, that’s not a way that you’re going to grow enormous amounts of net worth. What that is, is kind of cycling uphill: you get to the top of the hill, and then you start to go down; when you reach the bottom of the hill, there’s nothing left.
The way I like to look at it is my nest egg is streams of income. It’s the golden geese, right? Jack and the Beanstalk. The story there is, if you had a goose that laid golden eggs, would you eat the goose or eat the eggs? Obviously you’re going to eat the eggs. You’re going to leave the goose there because tomorrow they’re going to give you another egg. You then have sustainability.
Now what if actually you could hatch one of those eggs and then have two geese, and then maybe hatch another egg and have three geese? The more geese you have, each of these being a stream of passive income, means now you have more eggs coming in every day than you need. You have sustainable passive income for the rest of your life and for all the causes and generations to come in the future.
That’s the way I pursue passive income. If you’re interested in learning more about this, contact me. You can do that by clicking the button down below.
The great advantage about telling the truth is that nobody ever believes it.
– Dorothy L. Sayers