Everyone in the world knows the basic concept of a job and a paycheck. You sell hours of your life at a pre-determined rate to an employer, and depending on the terms, are compensated. Once compensated, you spend your money on goods and services you want. If you don’t save any money, or have any money in the bank, you have to go through the process again, and again, and again, and again. I believe the phrase, running on a treadmill, has been used to describe this phenomenon; particularly if you don’t like your job. The whole point of investing is to escape that paradigm. The goal is to turn a one-time paycheck into an asset that pays you increasing sums every year without you having to work. Would you rather lounge on the beach than work a job you hate? Investing and getting passive income is one of the best ways to escape.
If you weren’t born into a wealthy family, the odds say you are probably going to have to sell hours of your life for a paycheck. If you are happy with your job and life, I am ecstatic for you. For those who aren’t happy, take a look at how to escape the treadmill. If the immediate answers like finding a different job are unavailable, you need to start laying the groundwork for other options. This is where saving money is going to be key for you.
An Example from Thomas Stanley of Creating an Annuity Stream
Thomas J Stanley of Millionaire Next Door fame gave the following example. The family that started the Drury Inn initially started in construction. They would build the property, take the check, and go home. Wash, rinse, repeat. What the family eventually realized though was that they could construct their own properties, keep ownership, and take advantage of the rates they could charge their guests. Rather than taking a one time check, they now get an annuity stream according to Stanley. By keeping control of the buildings they construct, they now get an endless series of checks so long as the properties are maintained rather than a one off deal. What makes it great passive income is because they don’t have to work anymore on the project once it is finished. That is what you have to strive for if you want to leave your job.
Starting your Journey to Passive Income
The problem with trying to escape into early retirement is the beginning. It is incredibly frustrating looking at how you are saving a few hundred dollars a month, and knowing that in order to get financial independence, the journey can take decades. I am not going to lie, it stinks. There will be periods where you feel like you are stuck in the swamp. This is where you have to avoid the bogs and quicksand because there are quite a few dangers when you are starting, the number one thing being impatient.
Impatience can derail your dreams of early retirement faster than anything else. Many people will succumb to the siren call of leverage feeling the only way to get where they want is to borrow hundreds of thousands or millions of dollars. With that vast amount of money they will try to buy real estate without knowing what they are getting into. Before long, problems crop up, and the money is down the sink, and our hypothetical investor is in bankruptcy court even further behind than he originally was. The famous quote that can be attributed here is, “More money has been lost reaching for yield than at the point of a gun.” While I am not going to say that leverage is always a bad thing, there are other, and most of the time, more, intelligent ways of getting passive income.
Look at the story of the Drury Inn again. The family only changed who owned the buildings that were ultimately created, but the amount of wealth generated was far higher. If you are a software engineer, look around. The people who create apps may only put in a relatively small amount of money, but the rewards can be astronomical if you create the next angry birds. If you write novels, today’s era no longer requires you to pay money to the woodsmen, truck drivers, or the bookstore. You can toss it on amazon, and only have to share a cut of the profit with amazon leaving you with more money than authors past. The rewards of managing real estate or creating software platforms are also great ways to generate passive income with small amounts of money invested. If you hate your job, you have to sell yourself an hour a day, so that you can work on the projects that will pay off for you.
Playing the Long Term to get Passive Income
If you love your job however, there are alternate routes available to you. Investing in stocks has been one of the routes that leads to riches. If you choose the right asset like Coca-Cola or Berkshire Hathaway, you can get yourself set for life when you are ready to retire in 30 years.
When you invest a portion of your paycheck into a business like Coca-Cola, Coke will continue to send cash into your pocket every three months so long as the business is healthy. If you reinvest your dividends, and hold onto Coke for a period of around thirty years, perhaps a little longer, do you know what tends to happen? The annual dividends you receive will start to match what you initially invested. Did you invest $50,000 thirty years ago? Congrats! Coke is getting to the point where the dividends you get every year are around $50,000. All you had to do was take a large piece of your savings, invest it in Coke, and sit on your rear for thirty years. That is all.
People make it sound complicated. It isn’t. That doesn’t mean that it’s easy. Life happens, and sometimes health problems crop up along with other events. Barring events like that though, the equation is simple. Save part of your paycheck, find a few stocks in your areas of competence, reinvest the dividends, and in a few decades, you will have your parachute.