Passive income is one of the tools that Genius Types use to achieve the freedom to pursue their passion. Recently it has come a popular buzzword to personal wealth seekers thanks to books like “Rich Dad, Poor Dad,” by Robert Kiyosaki and “Multiple Streams of Income,” by Robert Allen. I would recommend these books to anyone who wants to change the way they look at money, and learn how to create wealth.
I grew up in a modest middle class family. I wasn’t even aware that passive income existed until I was in my late 20’s. We worked hard for everything that we had and I thought that I would just have to work harder if I were to become rich. When I started to study successful people, I started to realize that hard work was only half of the equation.
Traditional View of Wealth
The idea of passive income is a major paradigm shift for those of us who grew up with the traditional view of success: go to school, get a job, get promotions, buy a house, contribute to a 401k, and retire at age 65. The concept even differs from the idea of going into a high-paying profession or starting your own business. The problem with this traditional view is that time is traded for money, thereby limiting the amount of money a person can make by the amount of time he has.
The first paradigm shift involves a person’s perception of wealth. Most people see wealth as a dollar amount. These people spend their whole lives trying to achieve a big income because they think it will make them rich. Unfortunately, a big income is worth very little if their expenses are just as big.
When I understood this, I felt liberated. This concept made it possible to build wealth with a lower income. I realized that it wasn’t just how much money I made, it was how I spent that money.
The second paradigm shift has to do with how a person looks at investments. The traditional model is to save in a 401k until you have $1 million. Although this sounds like the American dream, there are several fundamental problems with this view.
One problem with the million-dollar idea is commonly experienced by lottery winners. Most people need instant gratification and therefore, many winners end up spending their entire winnings in two years or less. But even when a person understands delayed gratification, and keeps her million dollars in an income-producing asset, like dividend producing stocks, or treasury bonds, the payout is relatively low. At age 65, most investment advisors would advise her to switch her investments to less-risky assets to preserve her nest-egg.
At current conservative rates, one can expect to earn about five percent per year on these types of assets in retirement. Five percent of a million dollars is 50,000 dollars per year, or about 4,000 dollars per month, which represents her retirement income. At this point she would have time freedom, assuming her expenses were less than 4,000 dollars per month, but it took her forty years of sacrifice to achieve a relatively low amount of time freedom.
The New Paradigm
The new paradigm of wealth is not about how much money a person has, but how long that person could survive without working. If that person had $10,000 in savings and spent $5,000 per month, it would last two months. But, if that same person had $5,000 per month in passive income, it would theoretically last the rest of his lifetime.
With passive income, your money works for you, instead of working for your money. The idea is to collect assets that produce a steady stream of cashflow, month after month, with little or no maintenance. The holy grail of passive income is to collect enough assets to produce an income stream that is greater than your expenses. At this point, time-freedom is achieved. This means you are free to do anything you want with your time and you bills will still be paid.
At the moment of this post, I am not rich in terms of money, but I am rich in terms of how I spend my time. I have built enough passive income to allow me to work out of my house instead of getting a job. I work hard to sustain this standard, but I wouldn’t trade it for anything. I love the fact that I am in control of my time.
Leverage
Passive income is created by using the concept of leverage. Time, technology, and money are all things that can be leveraged; which mulitiplies their power exponentially and produces passive income. Leverage is especially important for people like me, who started without much to invest. By leveraging your time, money, or technology you can make the little you have go a long way.
Leveraging Money
A person leverages money by borrowing to buy an asset in order to produce more money. An important point to understand about leveraging money is that both returns and losses are multiplied under this method, so it is important to find the right asset at the right price to minimize the possibility for losses.
Robert Kiyosaki and Robert Allen are famous for teaching people to leverage money in real estate. They point out that it is possible to buy a $100,000 house with a down payment of only $5,000. This means that a person can control a $100,000 asset without having to save all of that money. If the house appreciates 5% per year, she will be getting a $5,000 per year return on her investment of $5,000. That’s a 100% return.
Being overleveraged in any asset class is dangerous and a common cause for bankruptcy. For example, consider a person who owns ten investment properties, each bought with no money down. If one tenant decides not to pay their rent for six months, the whole investment portfolio could crumble. Since the homes were each 100% leveraged, he couldn’t even sell one to help save the others.
My first piece of passive income was in real estate. I was able to buy a home with no money down and find a tenant who would pay enough rent to cover all of the monthly expenses. In the first year, I only made about $25 per month in terms of cashflow, but I was amazed to find out that the house had increased in value by over $10,000, and the mortgage had been reduced by about $6,000. On paper, I had earned an additional $16,000 that year with only a signature.
Leveraging Time
One common way to leverage time is to hire an employee to do the work for you. This is how must businesses operate. After developing a proven system for making money, the business owner hands the daily tasks off to an employee who does the work while she focuses on new ways to make money.
Leveraging Technology
Technology is leveraged when a moneymaking tactic becomes automated. The vending business is a good example of a business that exists because of technology that eliminates the need for a person to be there. Today, technology has advanced far beyond simple vending. Computers and the internet have made it possible to set up an entire business online that runs itself.
Creating Passive Income
When I learned about passive income, I was immediately motivated to find a way to create some. The problem was I didn’t have $5,000 to get started. In fact, I had over $20,000 in credit card debt that was making things even more difficult. I knew that if I was ever going to be able to collect assets that would produce passive income, I had to get out of debt first. I started selling everything that I didn’t really need, including my new car.
The best way to build passive income when in debt is to get rid of passive expenses. This means eliminating the debt that is taking your money each month while you sleep, including interest payments on credit cards, car loans, and any other debt you might have. It also means scaling back your lifestyle so that your monthly expenses are at the absolute minimum. While this lifestyle is not very glamorous, it is the first step to freeing up the time and money to work on passive income.
My debt and expenses had built up so high, that I found myself working harder and harder to achieve the same standard of living. The worst part was that even though I had plenty of million-dollar ideas, I didn’t have the time to pursue them.
The activities required to build passive income without much money, are time-consuming at first and don’t pay off immediately. This is why it is important to be free of debt and heavy expenses that require immediate financial resources. This process is a test of persistence and a perfect example of exponential growth. Getting out of debt is a slow process, at first it feels as if nothing is happening. Slowly, a small dent begins to grow and grow until significant progress is made.
After your debt is paid off and you begin to work on passive income, this slow process will seem to start all over again. As you spend time learning and gaining expertise in your area of passive income, it will seem as if nothing is happening. It takes a lot of time to set up the system that will create passive income.
If you understand the principle of exponential growth you know that the more you have of something, the faster it will grow. The more knowledge you have, the easier it will be for you to add to your income; and the more income you have, the faster you can create new sources of income, until the cycle itself becomes automatic. The process is initially difficult; most people lack the persistence or motivation to persevere through the initial hard phase, and onto the easy part.
A really great way to learn about passive income is to play the game Cashflow 101 created by Robert Kiyosaki. It is sort of like a super-charged Monopoly game. This game is expensive, around $200, but it is a great way to put some of these concepts into practice without actually risking real assets.
When I went to my first real estate wealth expo in New York City, I was amazed at how many people were there. We felt a small sense of panic that the secret was out of the bag and everyone else was going to beat me to the real estate punch. Then I realized that, given the map to success, 99% of people will ignore it because the road is difficult at first. Most people are only willing to get rich if they can have it quickly. They don’t realize that the hard part is up front, but the rest is easy.
As of this post in October of 2006, I do not pretend to be as wealthy as Robert Kiyosaki or Donald Trump. I am simply lightyears ahead of where I was a few years ago. At that time I was without focus, drowning in debt, multi-talented, but unable to do anything but work a job to pay my bills.
I knew that something had to change. I decided to learn everything I could about how successful people in the past made their way. As I learned, I began to incorporate the values and principles of successful people into my life. Now, I have reached my first goal, to be able to work for myself. I hope that you can take something from what I have learned and join me on my journey to success.
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This article by Brian Lee is one of the most sensible things I have read in a long time and will certainly put a link to it in my next article that I post on my site.
It reminds me of a comment made by Bill Myers one time when he was speaking in the UK once – and that was, to get control of finances quickly consider cutting expenditure by finding an area of the country that was cheaper to live in. You can do the same with material items too, and once debt and outgoing are cut, everything is easier.
This is great article! I am also writing article about active and passive income. I may say that this is an interesting post as well. Thanks for the info!
More power to your site! 🙂
Thanks!
Nice post!
I launched my first AdSense supported website just over 3 years ago. I didn’t know what to expect, but have been very pleased by the results. Some of you readers might be encouraged by my story as well as yours, so I’ll include a nutshell version here.
My first year on the web was probably the hardest one. I was spending about 4 hours a day, sometimes in the middle of the night, building new resources for my website. When you are making less that a dollar a day you tend to get discouraged. Still, I persevered. By the end of the year I was making $500 a month, and 64,ooo people were visiting my website every month.
Year two brought more visitors, and a greater reward for my effort. I was now trading 4 hours a day for about $1,500 a month. Still not great, but promising.
Around the end of year three I struck gold. More than 340,000 visitors a month were visiting my primary website, and I was making $4,200 from a collection of passive income sources, including AdSense and private advertising.
I don’t know where things will go from here, but it’s clear that you are in fact able to “leverage” you time in exchange for a passive income on the web.
I wish you the best in your business pursuits!
That’s a great case study for how it can be done.
Hi Brian,
I’ve actually bought the Cashflow 101 game and it’s very effective to change your attitude towards money.
Since I read Rich Dad Poor Dad my life changed. I took a lot of risks and I’m putting all my energy to achieve financial freedom.
I just wanted to let you know that I cannot stop reading your articles. I just started reading them a few days ago and I feel like I have had a major shift in my life as a result. I have been truly enlightened and I am going to take your advice on the books that you have recommended. Thank you for changing my life!
for some more passive blog income, you should link the book references in this article to an amazon affiliate account…
The concept of passive income has been more heartily embraced by recent generations. It is a different time with rapidly changing media. Income options have become much more diverse as a result. Thetraditional view of wealthinvolved working hard, putting your nose to the grindstone, pulling yourself up by your bootstraps and any other cliche one can think of, today’s generation favors working less and earning more. It makes sense, and a little innovation can create ways
[…] time with rapidly changing media. Income options have become much more diverse as a result. The traditional view of wealth involved working hard, putting your nose to the grindstone, pulling yourself up by your bootstraps […]
“With passive income, your money works for you, instead of working for your money.”
Great post
Thank you!
[…] Passive Income | Genius Types […]
[…] talks about how to do it in The 4-Hour Work Week, and my fellow blogger Brian Tracy calls it Passive Income (also see his excellent Five Ways to Create Passive Income). Author Robert Kiyosaki, among many […]
Another great post! So much great content, so little time!
My passion is game development, and it’s actually a very passive income stream as long as you keep releasing/improving the games. But I love making games and would do it for free anyway. (In fact, I am doing it for free at the moment for download on my website) I like the idea of leverage, being a game developer I can leverage publishers’ marketing and publishing skills so I don’t have to worry about it. Then the publisher ships the boxed games to stores where people will buy it without me even needing to be there! I can leverage customers too, the more customers I have, the more tips for improving the games I get. (Which will help me get more customers) I just can’t wait until game development covers my expenses, I love time freedom. Sometimes I wonder if I’m being overconfident or not, but getting a day job limits how much time I can spend on games. And after reading Pavlina’s article on why to never get a job I really don’t want one. So that’s why I googled passive income sources and found geniustypes.com, I want lots of passive income streams.
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[…] talks about how to do it in The 4-Hour Work Week, and my fellow blogger Brian Tracy calls it Passive Income (also see his excellent Five Ways to Create Passive Income). Author Robert Kiyosaki, among many […]
Many people have written off the entire industry. I was one of those people until I noticed that many of the popular wealth gurus were speaking favorably of it. Was there something that I was missing? Robert Kiyosaki, the author of “Rich Dad Poor Dad,” suggested that network marketing might be “the perfect business” in a CD interview. Robert Allen calls it “the ultimate money making machine” in his book, “Multiple Streams of Income.” These guys carried enough weight to catch my ear.
Thanks for the comment, Ben.
It certainly seems like the environment is getting more and more competitive, but I see it as a good thing.
The more bloggers out there, the bigger the market for blogs about blogging. 99% of the people out there don’t have the persistence or toughness to stick it out for 1 or two years of solid work before they start to make good money.
If you are one of the few that can, you can take your piece in this growing market.
This seems like a pretty easy concept but hard to really do. It seems to me that one problem with passive income is competition. For example, blogging is a very popular means of generating passive income but eventually there will be so many bloggers that it will be harder to compete for attention. Big media is already experiencing this phenomenon as it attempts to compete with the internet.
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, and focuses on life, creativity, and entrepreneurship. I have been reading Genius Types for a few days now, and am getting a lot of value out of it. We seem to have very similar views, and very similar drives for developing passive income streams. Anyway, I enjoyed the site & wanted to point my readers there today.  Thanks Brian.
That’s great news!
Hello Brian:
Good news. I have written a post pointing my readers to your website. I do receive value from your site & wanted to give my readers a chance to look it over.
Here’s the URI to the post:
http://www.ejabs.com/blog/2007/02/ejabs-featured-blog/
Thanks,
Matthew Jabs
http://www.eJabs.com
Five Ways to Create Passive Income With Little or No Money
Passive Income…
This is a good article for those who want to know more about passive income. I definitely recommend people to read it.
For more details
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What Kind of “Passive†Income Do You Want? posted at ThoughtfulConsideration.com – Get Your Think On, saying, “There are varios methods of earning extra money, some more passive than others.†Brian C Lee presents Five Ways to Create Passive Income With Little or No Money posted at geniustypes.com, saying, “Practical ways to really get started collecting passive income streams.†David presents How to Become a Millionaire posted at Worldwide Success, saying, “Learn how to build $1 million through savings and wise
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maintnence is low you could have steady income from your investment(s). The nice thing about passive income is that it needs little or no work (accept checking for results and book keeping) Websites about passive income: http://www.cashbloggers.com http://geniustypes.com/passive_income/ http://en.wikipedia.org/wiki/Passive_income My own passive income plan. At the moment i have 1 main income source and 2 small ones. The main income source i have is directly connected with another one because i can get free advertising for the second
maintnence is low you could have steady income from your investment(s). The nice thing about passive income is that it needs little or no work (accept checking for results and book keeping) Websites about passive income: http://www.cashbloggers.com http://geniustypes.com/passive_income/ http://en.wikipedia.org/wiki/Passive_income My own passive income plan. At the moment i have 1 main income source and 2 small ones. The main income source i have is directly connected with another one because i can get free advertising for the
advertising or distribution chains is redirected to the consumer in the form of commissions and bonuses. Not exactly free, but a lot cheaper than a full fledge advertiging campaign as you compensate as a percentage of sales. Read the full article: Why Corporations fear Network Marketing. Not happy with just one idea, Juuso comes up with 7 creatives ideas to Advertise you Product. My top 2: use your messenger status line and your own car… Supermom goes a bit farther and claims you can get paid to promote your business! Sounds too
How to Blog :: The Manual
. Steve Faber presents How to Become a Millionaire posted at Debt Free. Travis Farnes presents Get Motivated and Stay Motivated! posted at Self Improvement with Travis Farnes. Brian C Lee presents Five Ways to Create Passive Income With Little or No Money posted at geniustypes.com. That concludes this edition. Thank you to everyone who submitted articles to this week’s carnival. Submit your blog article to the next edition of Carnival of Success using the
. Steve Faber presents How to Become a Millionaire posted at Debt Free. Travis Farnes presents Get Motivated and Stay Motivated! posted at Self Improvement with Travis Farnes. Brian C Lee presents Five Ways to Create Passive Income With Little or No Money posted at geniustypes.com. You can submit your blog article to the next edition of Carnival of Success using the carnival submission form. Benjamin Bach is a Real Estate Consultant with Keller Williams Golden Triangle Realty
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restored. I don’t know how to explain that either – maybe it was from cooking watercress soup (recipe is a little bit similar to this, but mine was more traditional), maybe it was from playing with my daughter, maybe it was from thinking about income producing assets, or trying to convince traderZBS not to give up his trading career (now there’s a guy who could use some encouragement). Who knows. Nonetheless, to mitigate the damaging effects of the stupid side of me, my plan is as follows:
Blogging Manual( GeniusTypes.com ) Money from your blog ( StevePavlina.com ) Six Figure Blogger ( Problogger.net ) The short and curlies…