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A stream of passive income is only as good as your strategy to nurture it. You have to discipline your money, just as you have to discipline yourself in order to reach your goal.
As I wrote about in See Money Differently to Attract More, the wealthy look at money from a different paradigm than average people; and this way of seeing it enables them to accumulate more and more of it.
For example, let’s say you have a passive income stream of $250 per month from bulk candy vending. You have 10 machines that net $25 a piece and it only takes you 5 hours every other month to service them.
A lot of people find it fascinating that you own your own business, so they ask you a lot of questions. They act really impressed for the first part of the conversation and tell you that they have been thinking about doing such a thing. The questions keep coming and they finally get the courage to ask you what you make.
When they find out that you only make $250 a month, you just about always get the same response. “Oh, I see,” and their interest fades as if they have exposed you as a fraud.
“But it’s passive,” you say with no effect.
How They See It
You see, they look at money differently than you do, so they’ll never understand that you have planted a powerful seed that will soon grow. They think, “I could just pick up some overtime to make $250.”
If they had an extra $250, they’d think, “what could I buy with this money?” and it would be gone before they could even cash the check.
How You See It
You, on the other hand, look at it through the lens of the wealthy. Even though you aren’t rich yet, you soon will be because of your disciplined passive income strategy.
You’ve compartmentalized the money and assigned it a different strategy than your normal income. Since you make enough to cover your expenses with your normal job, you allow your passive income to create a life of its own.
In each of the ten months before, you’ve put aside $250 of your regular income to buy a machine and fill it with candy. Now that you have ten machines and $2500 invested, you’re ready to let your strategy play out.
Your first goal is to recover your cost basis, or $2500. That should take you ten months since you make $250 a month.
Since you’ve compartmentalized the money and assigned it a different strategy than your regular income, the $2500 you recover in ten months won’t be available for you to spend. You’ll buy a small stock portfolio with the money.
Now that you’ve recovered your cost basis in your candy business, your strategy is to reinvest 50% of your profits in new machines to grow your business, and keep 50% for yourself to add to your normal income.
When your stock portfolio has doubled, you plan on recovering your basis again and using it as a down-payment on some cashflowing real estate.
The fact that you had a disciplined, well-planned strategy for your money gives you a significant advantage over most people. $250 is not a lot of money by itself, but when you give it a mission, it can make you wealthy.
It’s Not the Plan, it’s the Discipline
How great your plan is matters less than how well you follow through with it.
Indecision holds back most people. Every time they read a new book or hear about a new strategy, they change their plan. Every time they change their plan, their seed starts over as a seed.
Successful people make decisions quickly, but are very slow to change their minds.
Keep Your Day Job
$250 is much more powerful when it’s in addition to your regular income than when it’s your only income. Making a leap of faith and relying on your passive income is a bad strategy.
Keep your day job and leverage your passive income so that you will eventually be able to make the transition to time-freedom.
Compartmentalize Your Money
Separating your money mentally is an important first step to seeing it differently, but you can’t separate it mentally if you haven’t already separated it physically.
The first thing you should do when starting a passive income program is get a separate bank account. No one in the world has the discipline and attention to detail required to work a passive income strategy out of one account.
I have about a dozen accounts, and even though my banker looks at me funny, I don’t need him to understand to keep working my strategy.
Never Touch Your Goose!
You’ve heard of the goose and the golden egg. The farmer got greedy and killed the goose to get to the golden eggs, but when he opened it up, there was nothing inside.
Your goose is your cost basis, or the money that you have personally invested in your assets. Once you have invested money into your passive income strategy, you are never to touch it!
Most people can’t stand the thought of never being able to touch their investment, but you see it differently. You know that your invested money will produce more money. Since you are disciplined and patient, your goal is to enjoy the golden eggs and not the goose.
Here are a few common passive income strategies.
Cost Basis Recovery
Mentally and physically separate your cost basis from your profits. Your cost basis is your precious goose, and can’t be tied down for long. As soon as you invest it into something, you should be asking when you’ll get it back.
You might set up one bank account for a capital pool that you fund with an automatic withdrawal from your checking account each month. Then, you might periodically take money out of your pool to park it in another asset just long enough to recover your cost basis and put it back in your capital pool again.
With this strategy, your goose is laying golden eggs that are growing up to become new geese that lay new golden eggs.
In this strategy, you always divide your profits in half. One half is reinvested and the other half you take home to enjoy.
This ensures that your goose will continue to grow, but allows you to reap some short term benefits as well.
If you have a long-term horizon to work with and lots of patience you might decide to reinvest all of your capital until a you reach a certain goal.
In the above example, you might decide that you are not going to touch any of the profits from your candy business, your stock portfolio, or your investment real estate until your positive cashflow is big enough to cover your expenses.
You keep working your normal job during the week and building your passive income on the weekends for three, five, or maybe even ten years. It might sound unbearable at first, but think of the freedom you’ll have the day you can quit your job and live off of your passive income.
Time freedom is when your passive income covers your expenses. If you have time freedom, you can do anything you want for the rest of your life! I think that’s worth five or ten years of sacrifice.
A great way to take advantage of the tax benefits of passive income while sticking to a disciplined strategy is the expense coverage method. In this strategy, you build passive income with the goal of covering certain expenses.
For example, you might make it a goal to make enough passive income to cover a cell phone for business use. Your next step might be to make enough to cover the portion of your home that you have designated for your business.
I’m not a tax advisor, so make sure to talk to an accountant when it comes to deductions.
Even when you have maxed out on your deductions, you can still make it a mental goal to make enough money to cover certain non-deductable expenses like your entire mortgage, or your cable bill.
The secondary income strategy is a very powerful way to motivate yourself to build passive income.
For example, instead of saving up for a new car, save up for a passive income producing asset that will eventually buy a car for you. It might take you three times as long, but once you have the asset it will continue to produce income for you for the rest of your life.
You could buy a new car every three years with the money you saved up once!
Instead of going on vacation, buy an asset that can give you a vacation every year.
One of my favorite passive income strategies is to find creative benefits from passive income that don’t show up on your income statement.
For example, I have candy vending machines in both Austin, TX and Los Angeles (read this article for the whole story). I primarily live in L.A., but return to Austin every two months to service my Texas operation.
Everyone always asks, “Why don’t you just hire someone to take care of your Austin locations?”
The answer is because I get a non-monetary benefit from returning to Austin every two months. First of all, I love the city and it becomes a small vacation for me. I’m able to catch up with old friends and eat real Tex-Mex.
Also, I’m able to keep an eye on the investment real estate that I own there and look for new deals. Austin’s market is on fire right now while the California market is hurting.
As I travel back and forth, I accumulate airline miles that I can cash in once a year for a vacation.
Finally, it gets me out of the claustrophobia that is Southern California. Getting out of the masses of people helps me to relax every once in awhile!
Another great way to get non-monetary benefits is to use real estate. For example, I’m looking to buy a house with a garage apartment in Austin. I plan on renting out the house and keeping the smaller apartment as a crash-pad.
Subtle differences in paradigm make the difference between excellence and mediocrity.
If these differences were so easy to see, then more people would be wealthy. Learn to be disciplined and see your passive income in terms of a great strategy. Others may not understand, but you will reap the benefits in the long run.