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The Power of Passive Income
Make Your Money Work for You
Nightingale-Conant, Staff of Entrepreneur Media
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eBook - ePub
The Power of Passive Income
Make Your Money Work for You
Nightingale-Conant, Staff of Entrepreneur Media
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Ăber dieses Buch
- Entrepreneur Media has partnered with Nightingale Learning Systems (NLS), the world leader in personal development tools for over 50 years, to bring readers 12 ways to make money work for them so they can live their lives.
- Previously released as an audiobook and workbook combo, The Power of Passive Income has been updated with new content specific to Entrepreneur Media's audience of business-minded and savvy entrepreneurs looking to make money work for them.
- Includes interviews, tips, and advice from some of today's passive income influencers
- The topic of passive income is strong for foreign English-speaking markets based on Entrepreneur.com's traffic and licensees
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Personal DevelopmentThema
Personal FinanceCHAPTER ONE
LAYING THE GROUNDWORK
Before you get to know all of the many ways you can make passive income work for you, we are going to talk about some of the basics behind the power of passive income. Letâs start with the name of itâpassive income. The word âpassiveâ sometimes gets a bad rap. We are urged to be active participants in our lives, not passively let life happen to us. Thatâs a fair point, and itâs a useful rule to follow. After all, you are the driver of your destiny, and only you can make success happen. However, when it comes to making money, there is a power in doing so passively. In other words, getting the most bang for your buck with the least effort. Wouldnât it be great to have an income stream (or two, or three) that, once set up, brought in money for you while you were doing other things? Of course! Think of the time you could spend doing what you like with the people you love if you had an income stream that was doing most of the work for you. Thatâs the power of passive income!
The amazing thing is, huge numbers of people donât know that passive income even exists. If youâre one of those people, you work hard for your money, and in order to have more money, you think you may have to work even harder. Since thereâs a good chance thatâs how you see things right now, try making a radical change in your perceptionsâletâs call it a paradigm shift. Itâs more than just changing the way you earn money or gain income. Itâs a transformation in the way you see money itself. Itâs seeing wealth and success in entirely new ways.
Right now, for example, perhaps you see wealth in terms of a dollar amount. Letâs consider a quick scenario. Say Mr. Smith has $20 million, so heâs wealthy. Mr. Jones is $20,000 in debt, so heâs the opposite of wealthy. But a number is just a numberâitâs not true wealth (or lack thereof). For our purposes here, weâre going to ask you to take the price tag off wealth. Instead of thinking in terms of thousands or millions or billions, weâre going to be talking about freedom and fulfillment and creativity. That doesnât mean youâre not going to be making more moneyâbecause you definitely are. However, youâre going to make that because youâve learned how to see money very differently than before.
KNOW YOUR âWHYâ
In this book, weâre going to be asking and answering a lot more âwhatâ questions than âwhyâ questions. For example, weâre going to talk about what you can do to start an online business or what youâll need to develop income from real estate. But here at the start there are a few why questions that need to be answered. Once youâve got those answers in place, the tools and tactics of passive income will be a lot more effective.
So, ask yourself why you want more income. For a lot of people, that may seem like a foolish question. Wanting more money is just hardwired into us, isnât it? Itâs like the old saying: You canât be too thin or too rich. But if you think about it, money is never really an end in itself. The desire for wealth is something different from just wanting to hold a lot of bills in your hand. For some people, money means access to material possessions, whether itâs a big yacht or fine watch or just a nice house to live in. For others, wealth means security. Itâs not having to worry about how youâre going to pay the mortgage or fund your childrenâs education. All those things are very worthwhile expressions of wealth.
THE NEW MEANING OF WEALTH
For our purposes, however, weâre going to suggest a slightly different way of thinking of wealth. At least initially, your goal in creating passive income will not be the same as the other financial objectives you set for yourself. In one word, what weâre going to achieve here is freedomâfreedom from the need to keep earning more, working harder, and trying to sell your time to the highest bidder. The passive income streams you create are going to relieve that pressure. Once the pressure is relieved, youâll have much greater freedom to make key decisions in your lifeâboth financially and in every other area.
Right now, you may be in the position of having to take every assignment that comes along. For good reason, you may be unwilling to think about making a job change or a career transformationâbecause youâre worried about missing a paycheck. In your heart, you may still have larger financial hopes and dreams, but right now youâre in bondage. Youâre tied to the time-for-money framework, and within that framework, your options are very limited. Creating passive income will take you outside that box. Bondage will be replaced by freedom. Instead of just meeting your financial needs, youâll begin to make your own financial choices.
This is an extremely important point, so letâs make sure weâre clear about it. Itâs great to have lofty, long-term financial goalsâbut itâs going to be hard to achieve them if your single income stream goes to just maintaining the lifestyle you have now. Passive income streams will give you the liberty to pursue your goals more aggressively. Itâs certainly true that the passive income ideas weâll be talking about can themselves become major income sourcesâbut initially they are sources of freedom. Theyâll give you the freedom to look at the big picture of your financial life, to see the opportunities, and to act on them immediately.
FIND YOUR FREEDOM
By now youâre probably starting to see that the concept of passive income is a major viewpoint shift. Within the time-for-money equation, most people spend their whole lives trying to achieve a big income. They think a big income will make them rich. But a big income is worth little if expenses are just as big. People who are still working harder and harder to sell time for money are not really living the life of wealthy individuals, no matter how big the numbers are.
This leads to a second shift in viewpoint. Weâve said that our initial goal for passive income is financial freedom. If youâre like most people, this is a goal that will be attained incrementally over time. You may not be able to quit your day job immediatelyâyou may not even want to quit itâbut as your passive income increases, your dependence on your day job will decrease. Ultimately, of course, passive income can liberate you from needing to work at all. You may still choose to work, but thatâs very different from needing to.
But hereâs the point: Whether this happens will depend not only on the amount of your passive income, but on how you spend it. To help understand this, thereâs a well-established principle of workplace behavior called Parkinsonâs Law. This principle states that the time needed to complete a particular task will expand to fill the time available. If people have a two-week deadline to complete a report, the vast majority of them will take two weeks to do itânot because they need that much time, but because thatâs how much time they have. If they had a week to do the report or if they had a month, they would get it done in that time, too.
For the vast majority of people, spending works the same way, or almost the same way. If we have a $100, we find ways to spend a $100âor maybe $110. We live in a mindset of instant gratification, so as soon as we have the means to gratify ourselves, we do it. But if you can get out of that mindset, itâs actually possible to start building wealth even with a significantly lower income.
GET OUT OF THE DEBT HOLE
Before we go any further, itâs important to address an issue that affects millions of Americans. Hereâs how one entrepreneur described this issue: âWhen I learned about passive income, I was immediately eager to get started. But there was a problem. I didnât have any working capitalâand I mean not any. In fact, I had over $20,000 in credit card debt. I knew that, obviously, that was going to make things very difficult. So, the first order of business was to get out of that hole.â
That hole of consumer debtâcredit card debt in particularâcan paralyze you financially even if youâre totally up to speed in every other way. You can be motivated, intelligent, creative, and everything else, but if youâre having to service debt every month, youâre not going to have the small initial investment capital you need. You donât need a lot of assets to create passive income, but you do need some. You canât afford to be paying credit card bills with money that could be going toward your financial freedom. Passive expenses are just as real as passive incomeâand credit card debt is the ultimate passive expense. So letâs take a quick look at how to get rid of it.
The first step is a bit of honest self-assessment. Many people feel so badly about their consumer debt that they actually donât know how much they have. Theyâd rather not think about it, so they just pay the bills every month and put it out of their thoughts. Thatâs not the way to make credit card debt go away, however. Start by determining exactly how much you owe. Frightening as that may seem, youâll actually feel better once you have a dollars-and-cents figure to deal with. If itâs any consolation, you can be sure there are millions of people who are in exactly the same boat. Well, youâre going to get out of that boat starting today.
One of the challenges of consumer debt is that it can get started quickly, but getting out of debt can take time. You can put a thousand dollars on your credit card in just a few secondsâthen you can be stuck with that debt for months or years. The truth is, beating debt is a gradual process, and it can seem especially slow at the beginning. But have faith. Signs of progress will begin to appear, and gradually they will begin to multiply. And remember: As you get rid of your passive expenses, your options for passive income will start to open up. Even if you donât realize it at first, youâll already be closer to the freedom that passive income represents.
When youâre first beginning to attack your debt, itâs important to eliminate as many unnecessary expenses as possible. In other words, the best way to build passive income when in debt is to get rid of passive expenses. This means eliminating whatever is taking your money each month while you sleep, including interest payments on credit cards, car loans, and any other recurring bills you might have. For the moment, you will want to organize your lifestyle so that your monthly expenses are at the absolute minimum. Think of this as a tactical maneuver, not a permanent condition. Because if you follow this plan, the day will soon come when youâll get everything back and moreâplus, youâll really be able to afford it.
Weâre not going to spend a lot of time on debt issues, because the facts are pretty straightforward. There arenât really any secrets, and the solution is just common sense. Cut back or eliminate your credit card purchases, transfer high-interest debt to lower interest accounts, and try to pay at least twice the minimum balances each monthâstarting with the highest-interest debts. Think of this process as a test of your commitment to success. As your debt shrinks, your working capital will grow. Before you know itâin months, not yearsâyouâll have the nest egg you need to really build passive income.
INVEST IN YOUR NEST (EGG)
If youâd like to have an exact figure of what it will take to get started on building your passive income stream, $5,000 is more than enough. Keep in mind that you can get started with a bit more or a bit less. But $5,000 is a doable initial investment for most (once any debt is out of the way), so letâs run with it. Once you have that amount of money to invest in your initial moves to build passive income, youâre really ready to go. Assuming youâre at that point now, keep in mind the principles weâve discussed. First, wealth is not based on a dollar amount. Second, we tend to spend everything we have, whether itâs on consumer purchases or consumer debt. These principles affect not only our day-to-day experiences in the retail marketplace, but also our investment behavior. For example, when people start saving for retirement, itâs not unusual for them to set a goal of $1 million. They keep putting money into a 401(k) or some other investment vehicle until they reach the $1 million target. Then, several different things can happen. A certain number of people will think they have so much money that they start spending the principal. They may not spend very much at first, but it adds up. Thereâs a kind of self-sabotaging mechanism in this. Something similar often afflicts lottery winners, because studies have shown that many winners end up spending their jackpot in two years or less.
But suppose an individual doesnât spend the million dollars thatâs accrued over the years. Even if they keep it in dividend-producing stocks or treasury bonds, the payout is relatively low. If you choose a conservative strategy, which is what most advisors would recommend, you could expect to earn about 5 percent annually. Thatâs approximately $4,000 per month. Itâs not an inconsiderable sum. It can definitely help achieve the kind of financial freedom weâre talking about. But if all youâve done during your career is fund your IRA that freedom has probably come at the price of many decades of bondage. In this book, weâre going to show you how to do considerably better than that, and without increasing your risk.
MANAGE YOUR INCOMEâAND EXPECTATIONS
A key piece of information in passive income is the amount of money you need to live without working. Clearly, there are two factors to consider here: how can you maximize your income, and how can you manage your spending? If you have very extravagant tastes, the amount of money you need will obviously have to be larger. You just need to be aware of that fact. It doesnât mean you have to live in a cardboard box now to benefit from passive income later, but you shouldnât expect to be buying private jets, either. Anyone who tells you differently is not being honest with youâand one thing weâre going to be in this book is honest.
Simply put, the ultimate goal is for your passive income streams to be greater than your expenses. When that happens, youâre free to do anything you want with your time, and your bills will still be paid. Needless to say, youâre also free to keep working in order to become really wealthy if you so choose. But you donât have to do anything. Thatâs the objectiveâand you will achieve it as long as you know how to leverage the income (and other assets, like time) that you already have.
LEARN ABOUT YOUR LEVERAGE
In creating passive income, thereâs one word you should always keep in mindâleverage. In financial terms, leverage is the ability to multiply an asset without increasing your investment or your risk. This is especially important for people who are building passive income without much capital at the outset.
There are lots of ways to do this. Letâs consider real estate as an example. which weâll be discussing in more detail later in the book. Bestselling authors like Robert Kiyosaki and Bob Allen have done great work in showing how passive income can be developed in that area. As theyâve pointed out, itâs possible to buy a $100,000 house with a down payment of only $5,000. That means you can leverage $5,000 into control of a $100,000 asset. If the house appreciates 5 percent per year, youâll recover your investment after only 12 months, and then youâll continue to get $5,000 for every year that follows. But thatâs not all. There are a number of other variables that can work for you in real estate. Suppose youâre able to buy a single-family rental property for no money down, and you find a tenant who pays enough rent to cover the monthly expenses. You may not make much profit in terms of cash flow, but thereâs also a good chance that the house will increase in valueâand by the end of a year, youâll have paid down part of the mortgage. Through the power of leverage, youâve gained significant assets with no investment except your signature.
Time can also be leveraged, just like moneyâand since freeing your time is one of our major goals, knowing how to do this is a key skill. There are several ways that time can be leveraged. For example, you can hire an employee or maybe even more than one.
Now it may seem like youâll need to have a real up-and-coming business before you can begin taking on staff, but this isnât always true. One very successful entrepreneurâletâs call him Richardâhad almost nothing in the way of inventory when he began hiring employees and building an income stream. He had no office and no business cards. All he had was a copy of a very old and very charming cookbook that he found at a flea market. Richard took it to a full-service copying center and had some bound copies made. He even added a nicely designed but inexpensive cover. Then Richard ran a very small ad in the newspaper of a local university. The ad said that he was looking for students to work part time doing canvassing work. It also said that there was the potential for very good pay, and that the students could make their own hours. So far his total expenses were about $150.
Although it was pretty obvious from the ad that there would be some selling involved, Richard had plenty of responses. The selling was so low-key that it really could be called canvassing, and the flexible hours also were attractive to college students. When he met with the applicants, Richard told them that their task would be very simple. Each student would be given a cookbook. They were then instructed to approach as many prospects as they coul...