Earned income, and passive income are two different things. People often mistaken one for the other. No matter what journey you are on, you must have both. You cannot have one or the other (the few who could only have passive income, should actually have both). You must have both because one feeds the other. To have passive income, you must first have earned income.
Passive income is income that pays you ‘dividends’ or ‘interest’, such as pension income, distributions from retirement accounts, capital gains, interest income, dividends, passive income generated from rental real estate, stock dividends, etc. All of these types of passive incomes are generated through some type of ‘investment’, whether trading years at a job for a retirement account, buying stocks that have appreciated, or buying real estate property that produces positive cashflow.
Earned Income is income that you have traded for, or that you have worked for. Earned income is produced from trading time for income. Such as hard labor for an hourly or salary pay, trading knowledge for a fixed rate, selling a product that produces a profit, and even running a company. While running a company, (unless you just own equity as an investor), you are still trading time or energy for a salary or a percentage of the net or gross margin. This is where people get confused between the two types of income. The true way to become wealthy, is to continue producing more earned income, and taking a percentage of that income and investing in Real Estate that will produce passive income for years to come.
To build true wealth, we to maximize our earned income, to produce passive income. To maximize our earned income, we need to do two things, produce more than one stream of earned income, and earn as many dollars as possible from each of those streams of earned income.
As you probably know, trading your time for money, is almost the worst place to be. There is so many different levels to this because technically, you are always trading time for money on some level But it is the amount of money you are trading for, and the limit of time you are able to produce that is the problem. If you are working for someone and can only work 40 hrs per week, you are very limited to the amount of income you have from this source. So you can either do one of two things in this scenario. One, have a higher paid job for those 40 hrs you are trading for, or two, figure out a business that come produce $x per/hr for 24 hrs a day.
Here is an example, if you are working for an hourly/ salary for $20 per/hr and work 40 hrs per/ week, You can earn $1,120 a week. If you could build a system that produces $8 per/ hr 24 hrs per/day. You can earn $1,344 per week + have more time to earn more income.
The next think we can do to produce more income, is to build or use another source of income. For those who are limited to working 8 hrs per/ day for $x per hour, this is very limiting. The best way to multiply your income is to use more hours of the day. For example, if you know how to wholesale houses, drop ship a product, or sell an online program, you can spend an additional 4 hrs per day earning that extra income, you can also spend an additional 2 hours per day, building a system that produces more earned income, while you sleep.
I know this might sound crazy to work 14 hrs per day. But the sooner you can multiply and maximize your earned income, the sooner you can start to invest to have a stream of passive income. Nothing is easy, but the more knowledge you have around ways to produce earned income, the easier it will become.
Building passive income through assets is one of the most important things you can do your you life, and legacy. It can pay you while you continue to to earn income, and it can pay your kids, and your grandkids, for years, and years.
People often get confused with the different between incomes in Real Estate, if you are fixing a house with your own hands for a profit, this is not passive income. If you are representing the seller as an agent, this in not passive income.
The way to produce passive income with real estate is to purchase property that produces positive cash flow from rents, while the debt is being paid down, and appreciation is going up. The more the debt gets paid down, the higher your Return On Investment will be!
There are many ways to build this passive income through Real Estate, you don’t need to buy with cash, or necessarily get a bank loan on everything if you are unable to. There are many ways to get creative in purchasing real estate with low or no money down!
This is where wealth is born. While producing earned income, you have passive income paying you at the same time. The first major goal with passive income is to have enough passive income to pay for your bills, food, rent etc. (what we like to call “cracking your nut”).
This will take some time, depending on how much earned income you can and will produce. The more you can invest, (time or money) the more passive income you will have.
If you haven’t already, you should build a spread sheet that outlines how much earned income your have vs your expenses (this can be scary if you have not done this before). Once you have an understanding of how much income you have left over after your expenses are paid for (if any), you can ask your self how much you are willing to invest vs save or buy something for your self. I would not recommend spending your extra cash on glamorous clothes or 5 star dinners each month. This extra money is your key to future financial freedom. I also dont recommend saving all of that extra money, it in smart to have a ‘safety net’ locked away if ‘shit were to hit the fan’, but it is more important to set aside as much money as you possibly can you invest in Real Estate that produces positive cashflow. THIS IS PASSIVE INCOME!
You have to decide what percentage of your earned income you are willing to invest ‘give up’ each month, to create financial freedom for the future. Remember, over 90% of Millionaires are holding Real Estate for long term.