What is passive income?

Nov 22, 2019

Do you want to understand what passive income is? Do you want to understand perpetual cash flow and why multiple streams of cash flow is far better than a large pond of cash?

Today we are all taught to save a large pond of money. This can be your pension which you contribute to for 40 years. It can be alternative savings as well. Once you have 25x your annual expenses in this pool of money, you are essential financial free.

There are other ways that are more assured and afford you a far richer lifestyle!

Think of a beautiful lake surrounded by tall snow capped mountains. The picturesque mountains have small streams of cold water flowing from the snow caps down into the lake. As the lake water is consumed, the streams constantly replenish it.

The goal is to build enough streams of income that the cash flow from these streams surpasses your annual expense needs. Thus, you can drink from the streams without reducing the size of the lake!

Each mountain around this lake represents a physical piece of real estate I own. The streams are the rents from my real estate which cash flows which flow into my bank account (lake) each month. The streams continue to flow each month and the lake is constantly replenished without me having to work for this money. This is Passive Income! Passive income allows you to be free to do what you enjoy. Once you have sufficient cash flow, you are financially independent.

Passive income is income that flows to my bank account each month, without me needing to work for it.

Why is passive income a better approach than saving 25x expenses?

I believe what gets measured gets done. Each time my investors and I buy another apartment building we are adding more streams of income to our valley. These streams can be either used to pay for expenses or to buy additional investments which further grows more streams of income. If the stream are not used for covering expenses, then they grow your networth (size of your lake). If you consume the monthly cash flow from the stream, you still have not diminished your network. You have only shifted passive income to the expense column in your personal financial statements. Check out my post on personal financial statements and accounting to understand what I mean or read Rich Dad, Poor Dad.

Passive income earned without labour or trading life for work, but believe me, I manage the investment. This management effort takes me a couple hours a every few months. This is because I have professional full time property managers in place for every property. My job is managing the manager!

Thus, I can continue to do what I want with my time and manage my investments from anywhere in the world.

Why are multiple stream better than a lake?

I love having multiple deposits into my bank each month. These streams flow in each and every month and replenish the account. If for whatever reason, one stream is a little drier one month, it doesn’t matter, the other streams ensure the lake is filled. When the lake starts to overfill, I buy more real estate.

When I need to buy a car, I make sure I buy real estate instead and the cash flow from the real estate pays the monthly car payments. The car will be paid off in a couple years and then I own a car as well as a performing asset which will continue to provide cash flow.

If you are interested in building passive income and becoming financially independent, then. . . Subscribe