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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 Difference
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.
Once you have a plan, let your seed grow. Persistence and discipline will allow your seed take advantage of exponential growth.
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.
Strategies
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.
50/50
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.
Hands Off
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.
Expense Coverage
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.
Secondary Income
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.
Non-Monetary Strategies
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.
Subtlety
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.
Exactly what i have been looking for. You are the best!
Thanks.
Hi Brian, did you go to college and what were you studying? where do you buy your candy vending machines? Are you currently working a day job or are your multiple passive incomes covering enough for you? Your articles are interesting.
thanks!
Hey, thanks for the questions. I got a degree in marketing when I was in school, but I don’t really think the specific degree is as important as the college experience itself. I probably benefitted most from accounting, economics, and management classes.
I work a day job, but it’s pretty sweet. I teach real estate investing for a very like-minded company that lets me have some flexibility to do my own thing.
I buy candy machines from this company called Amerivend in Los Angeles. They have great triple-vend machines.
Thanks again!
Passive Income is a great idea, if managed correctly. I’m only 18- still in High school, I’ve been discussing with my Boyfriend doing something to get a passive income- like a small vending machine thing or ATM’s during our college years so it’s picked up when we are actually working. Some day (not too soon- but maybe when we’re ready to retire) the passive income can continue and we’d be set- assuming all my research and calculations are correct.
18 is a great place to start! At your age, bulk vending is a good place to start because it is not very expensive and can teach you the basics.
By the way, check out my article on “What I Would Tell Myself if I Were 18 Again.“
What about something where like you start a company, and have to do all the work yourself (not very passive at all) but you can grow it to the point that you hire someone, and then another someone, then someone to manage the two someones, etc.?
Passive income can work, and work well. People do make fortunes on the net, but they tend to be the people who’ve done their homework, and know what will sell and generate income.
thanks. good article
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Yes,I service the machines myself; and I’ll continue to do so until my time is worth more than $50-100 an hour.
On your real estate question, yes passive income is what is left over after you pay all of your expenses including unexpected ones like maintenance and vacancy.
Do you go on a trip and service and fill all the machines yourself, or do you have people who work for you do it? Also for example in real estate if you had some rental properties when calculating passive income would that just be your profit from the houses, and expenses for the houses would include property taxes on each house and maintenance as well right? Thanks.
When your passive income exceeds your expenses is that considered financial freedom? If your passive income decreases for instance with rental property do you just get more?
How do you make sure no one takes your machines if they are not attached to the floor? Do you have more than one machine per location? Thanks.
Yeah, I would define financial freedom as passive income exceeding expenses.
If your passive income decreases, you need to adjust. No income is completely passive. You always need to keep an eye on it.
I have almost 50 machines and I’ve never had one stolen. I’ve had one vandalized, but not taken. That being said, I fully expect one to get stolen some day. That’s just the cost of doing business.
I have a few locations with more than one machine. My best location sells out two machines a month.
Hi Brian,
Nice article on passive income and everything, have any advice for the less creative person? I have read all your articles thus far on passive income and was wondering do you enjoy the business of vending machines? On a related note if you get a vending machine and you find a possible location do you have to physically attach the bottom of the machine to the road or floor or whatever? Thanks.
I think that vending is a fantastic way to get started in passive income. It’s steady, reliable, and easy to start if you have the guts to ask for locations.
The machines I buy are not attached to the floor.
I salute you.
you truly are a genius!!!!
hi brain, going through your articles for last 5 days,
i am finding it very simple and interesting.
these are very common things,but best part is that
common is not that common now a days.
please keep on educating and writing.i am eagerly
waiting for your articles.
rgds
amit kapoor
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I’ve been looking for good information about making passive income. It’s nearly impossible. everyone seems to be selling some sort of get rich quick scheme.
Thanks for cutting through the cruft with some real examples.
Thanks for stopping by, HalOtis.
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Passive income is something not everyone will ever understand…not everyone is that wise to see how powerful it can affect our financial lives.
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Hi Brian,
I found your blog while I was messing around (wasting time) on Technorati. Now I have another blog to add to my reader 🙂
Stumbled and bookmarked!
Yep, I think this is great!
This may sound simple – like people are attracted to like
Like minds are attracted to like
Like thoughts are attracted to like
If you are interested, there is more at: NigelPendrigh. Com/Interview
You have to be what you want to attract and in additon to applying your excellent advice, I would recommend that readers hang out with mentors and others with the experience of putting what you write into action
Links Worth Blogging Passive Income Strategies :: Genius Types
10 – Passive Income Strategies :: Genius Types
I think I fixed the bug. If anyone has a problem with the site again, would you please contact me? Thanks.
BRIAN, DO YOU WORK FOR TEH CANDY COMPANY?
No, I own my own vending business. Why do you ask?
That’s very flattering, Matt. I can always count on you to get my back.
[…] Your page is on StumbleUpon […]
Another great article from the advice fountain that is…Brian Lee! 😉
Do you realize that you’re turning in to the guys you used to (& stille) look up to? People are starting to read this & go…man, I wish I had going what this guy has going.
That’s gotta feel good!
Thanks, Steve.
Great Article Brian. I agree that you have to have a roadmap of the steps you are
taking to build wealth over time with passive income. It is also real easy to mix it
up with your personal expenses. I like the part about dividing off your
passive income streams as to look at them as separate entities.
Hey, I enjoyed the post. When I go to your site, I often get a pop up message saying internet explorer cannot open the website, then I have to reload a few times or click the back button, etc. I was wondering if anyone else had this problem, and how I can fix it?
Joe, that’s bad news. That means there’s a bug. I have no idea what it could be so if anyone has any suggestions, I would love to hear them.
Great post. Makes a lot of sense. I have many ideas but really never had a sound foundation to put them into practice. This post now gives me the reason and the effect my ideas in action would provide. You are lucky that you get to travel, I can imagine your face when you clear out the cash tins. Passive income at its best.
TerryG Psychic advice
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 […] read more
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.PUBLISHED BY: GENIUS TIPES
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