Sorry for the lack of blog posts recently. I've been on "enforced vacation" at work due to having too many vacation days, so I haven't had time to blog since I do most of my blogging at work when I'm bored :P I have about 4 topic ideas right now on various topics, so there's lots of material coming!
Going to go a little off-topic today and talk about RL matters for once!
Some of the reasons I went back to grad school was to find out more about how the business world works, why some people can make 7-digit salaries and how to become one of those people myself. The sad part is that the answer is simple: Connections. If you have the right connections, you'll easily slide into a spot making millions without any special talents in the business world. All you need to do is have the right friends (and possibly relatives). If you don't have the right connections, it'll take a lot of luck to get there. Simple hard work does not work.
Why hard work does not work:
The average person (say... 95-99% of US society) will live a life similar to the following scenario:
- Grow up, become an adult and enter the workforce at around age 20
- Work between ages 20-65, maybe 70, then retire. Maybe change jobs a few times, but ultimately be working for some organization for a salary
- Retire with anywhere between 5-20 years of their life remaining. The reward is "not having to work". However, by then, your body will be old and you won't be able to do as many things as compared to when you were younger.
However, for the average person, this sad scenario is actually necessary. By the time someone is 65, they will no longer be able to do much physical work to make a living. Their mental faculties have fallen behind the times and they can no longer keep up with technology. In order to have enough money so that they do not have to work as greeters at Walmart, they have to have enough savings when they retire to be able to sustain themselves for their remaining years.
To actually be able to retire and not have to work, you'd have to save anywhere between 5-20% of your salary for 40 years of working. Most Americans do not save anything at all and end up having to work during the years that they are supposed to be relaxing. (American saving rate at -0.5%) What's worse is that the American work ethic is such that they live to work, that is their entire lives are based around working. Add to this that Americans on average have 13 days of vacation days, this paints a very depressing picture. This means that on average, Americans only get 5% of their "Mon-Fri" working days off. Even the Japanese have an average of 25 days of vacation.
So... what hard work gets you:
- A lifetime of working for organizations or corporations just to save up for retirement.
- Spending your life working for an organization that will easily lay you off in order to make the "books" look good, not having any time to have fun on your own.
- Barely having enough to survive day-to-day after you retire. Your goal is to keep from being kicked out onto the streets
I don't know about you... but this sort of life story isn't really for me :) I'd rather go out and have some fun while I'm young!
Other options
So, the big question now is how the heck do we break away from this "norm" of society. How can us ordinary people break away from the rat-race? A few dreams out there include:
- Winning the lottery (right)
- Starting a company and becoming rich (Need the right idea, plus only 1/10 or 1/100 startups make it)
- Marrying someone rich (mmm... okay)
- Sit around and collect money -- passive income streams
It's the last option that is something I think us as average people might be able to pull off. The basics is that we'd want to enter "early retirement", that is, we'd regain our own time so that we can do whatever we'd want with it... play games, travel, watch TV, instead of having to keep going to work for 3/4 of our lives. In order to do this, we need to first answer the following question:
How much do we need
Think about your life. How much income do you actually need to be happy? Is it the bare minimum necessary for living + TV? Or would you like to travel around, buy new games as they come out? Depending on what your desired lifestyle is, how much you'll need will vary. However, the amount you will need is probably going to be higher compared to when you're working since you'll be planning on having lots of free time.
So, let's set a conservative rate of $60k/year for all your fun activities and keeping you alive.
How are you going to get this?
Now while $60k/year may seem like the average worker's salary, keep in mind that we want to get this money for doing absolutely no work. We want to be sitting there and collecting money instead. This isn't a dream. Consider your savings account at a bank. You get interested for doing absolutely nothing, just sitting on your money.
Now while bank savings are a pretty safe example of passive income, it's really difficult to live on just bank interest payments. To get $60k/year at 2% interest, you need about $3M in the bank. Look at it this way: If you have $3M, you can safely retire and simply live off interest! $3M isn't that much money, it's just 6 years salary of an Obama-approved CEO. For people in tech, it's also one lucky job at the right startup. Administrative Assistants and fresh-grads from college who joined Google months before IPO each walked away with over $5M and have since retired.
Interest is one way we can get money for doing nothing. However, the up-front cost is very high. You need at least $3M in capital to pull this off. What other passive income streams are there for us "ordinary people"?
Passive Income streams
Here are some of the classics:
- Rental property -- Buying residental property and renting it out to people. As long as the rent covers the mortage payment, you're essentially getting the apartment for virtually free, just tying up the downpayment that you need to buy the property. You don't have to pay the full cost of the apartment up front, just 20% of the value and then wait. Any rent beyond the mortage payment goes into your pocket. Once the mortage is paid off, all the rent goes into supporting you. Think about how much you pay in rent, then consider how many units you need to rent out to support yourself.
- Small (profitable) businesses/franchises -- Here's something interesting. All those small shops out there are not necessarily owned by the people working there. Many of them have a non-present owner that owns the shop, but hires managers and workers to run the day-to-day business. As long as the shop is profitable, the owner can continue to hire people and pocket any profits. Franchises are the same way. As an individual, you can buy or set up a Rite-Aid, or a fast-food chain with the right initial investment.
The two ideas above do require that you have some up-front cash in order to start things. Setting up a rental property requires some sort of a downpayment in order to buy the property in the first place. However, consider apartment prices throughout the country. Let's say you buy a $100,000 apartment and rent it out. You'd need to raise around $20-30k for your initial downpayment. That's about the cost of a car, and it will give you income down the road. This is a reasonable amount to save even from a normal salary. You'd need more to set up a small business, but the government has small business loans to help.
Other methods:
- Online Websites -- So this is an interesting one. If you have a sufficiently interesting site that people are willing to either pay a subscription to read, or you can put up advertising, this is in effect a passive income stream. It may not be much money, but as long as it makes money and does not take any of your time to maintain, it's a win! I believe this is the reason why we have so many domain squatters. Domains are so cheap that the very basic advertising that they have on domains is enough to not only pay for the domain, but also give the squatter some income. Sites like digg.com and Slashdot.org were created by people who had compelling content and ended up making their creators millions
- Write a book -- A book is a good example of a passive income stream. Write it once, sell it many times. If your writing is good and the book is popular, you can sit back and collect money. You can even write more books to add onto the income stream. The barrier to entry for publishing books is rapidly being reduced with online publishing and "print-to-order" services. The only investment you need to make here is time.
- Others?
So, the basics are, if you can come up with enough methods of earning money that does not require you to work for 1/2 of your waking hours, you can retire at any age. The question now is which one of these can you pull off successfully enough to retire. Additionally, the best time to do this is when you're young when you can afford to lose everything you own!
Myself? I'm still working the startup angle, though I'll be investigating the other avenues at the same time soon. Do you have any ideas for passive income streams?
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5 comments:
Glad to see you didn't even mention the stock market. While investing in the right company at the right time can earn you millions... the chance you're investing in the right company at the right time is very low.
As far as other income. Land right now is very low in price because of the economy and, as it has many times in the past, will later double in price when the economy gets better... provided it's in an area that's desirable. In MN, lake-front property starts at around 500K for the land alone and only goes up in price. If you can find a piece of property connected to a lake where there is no current access to that property... buy it! Because of the lack of access, the land will go for less now and double, triple, maybe even quadruple in price when roads are built close enough to access the land.
Another good place to buy land is on the outskirts of a very active city or a promising small town (by promising I mean it has something nearby that naturally draws people to the area for recreation). As the town grows, you can hold onto the land until a corporation decides it will be the perfect place for their next building and that's when you basically strike gold.
Don't forget, you can also live on that land while you wait for it's cost to go up... though you will pay more in taxes having a home on the property.
Anyway, just some ideas I've heard a lot around here.
Investments. I'm 24 and already have them. Actually my hubby has a relative who works for Norfolk Southern Railroad as a brakeman on the Coal Drags through Horseshoe Curve, PA. For Xmas he bought both of us a Huge investment of stock of NS Railway as a "Safety Net incase our jobs become non-exsistant". Norfolk Southern is not hurting to badly has they deliver a good chunk of the east coasts Coal Supply. Big Business and right now those stocks we have... if We were to cash in on them, we'd be able to retire now until we die. But it's a safety net. not to be used for anything else.
I posted on my Blog about how I have what I have and survive doing it. Basically 4 people in a 2 bedroom place. We split the bills, we shop cheap, hell I'm a thrift store buyer. If a TV Is on a clearance, I camp out 2 days in advance just to get it. 2 Things we do not skimp on: Bison, because it's healthier and safer then cows, and Milk from Oberweis who doesn't use growth hormone's on their cows or rBSTs. everything else.... I shop independant grocery stores in my area.
We have 4 cars among us. But we only use 2. Jamie, my friend uses her b/f's Explorer and I use my Eclipse. Well make that 5 as I have my Triton Pickup but that's not street legal. no license plates and it's out of my license class because of weight. It's BS But it's an offroad winter truck, go figure.
I have 4 G-Scale Boxcars to get at the east coast show this year (My friend is paying for my train and hotel costs). 200 for the 4 of them. That means that I've had to drop a cable tier. Fine by me. I'll get it back soon enough. It also means that my Eclipse will not recieve her intercooler upgrade until much, much later.
Finally sometimes I get lucky. Won a 15 pound metal steam locomotive in a raffle at the local train show this past week. I sold it on eBay for 1500 + 67 Shipping. That's enough to pay this month's bills with enough left over to spend on my boxcars next month.
As for the money I make at work? It's not given to me on a silver platter. Modding cars is my passion, but it's hard fucking work. We're commission based ontop of our paychecks. And with a deadline hanging over your head like a pendulum, life can get very stressful. The Job I work in has an increased rate of heart attack due to my stress levels.
Ahh, I didn't mention stocks, or buying investment properties because the point of this article was to talk about passive income. Stocks are generally investments that you have to either buy and hold with no income, tying up your money for X years before you can sell, require active trading (and hence, becomes a "day job"), or give dividends (and is similar to a higher risk savings account)
For buying land, well... problem with what you stated there Zu is that you're hoping for the land to go up in price. Meanwhile, how are you going to pay off the loan? Can you rent it out? Also, while it may be a good payoff 10, 15 years from now, meanwhile you're still working instead of retiring early.
Karou has the right idea on cutting expense, being cheap and saving up. She's lucky to already have investment gifts from relatives. The rest of us have to work a little harder to get to such a good position :)
Well, buying land is an investment to go along with anything extra you might have saved up. Turning what would only be 100k, for example when you do use it into 200k or more when you actually use that money... so it's really just a way of increasing a lower amount of existing retirement fund.
I always forget in stocks there are "safe stocks". Utilities are considered one of these safe stocks because people always use/need things like electricity for their homes, or fuel for heating/transportation, etc. Also necessity based companies (grocery stores etc.) are safer stock investments as people always need to eat.
I agree with you 100% on cutting expenses as well. I, myself, don't watch TV but once a month maybe and even then only because someone else is watching it, so that allows me to cut about $30-$40/mo off my bills. Another is not having a land-line phone and using my cellphone for all my calls. It makes very little to no sense to have a land-line anymore, and cutting that out saves me another $10-$20/mo. I also haven't bought a newly released game since... well, since FFXI came out. Instead I wait for the cost to drop to about $30 from the usualy $50-$60.
I'd guess my monthly costs come to about $1000, not including student loans (which are being deferred anyway while in school), but including pretty much all other expenses, and $500 of that per month comes out of the student loans to pay for rent since my college doesn't have on-campus apartments.
Anyway, I seem to have a knack with making good connections with people. So I'm hoping what you said works out for me and I can move up quickly in whatever job I come across after I graduate.
Start a pyramid scheme... and don't get caught doing it.
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