How To Build Passive Income For Financial Independence

Yellow Leaf MacroCreating genuine passive income is the holy grail of personal finance. Not all passive income is created equal mind you. Some streams take much more initial effort to start, such as saving enough to buy your first rental property. But once you start it’s very difficult not to gain momentum.

Everything passive first takes active energy. The time to put in the effort is when we are young and not ravaged by disease or burdened by family obligations. I remember being able to snowboard from 9am until 4pm every day for a year. Now, I’m lucky to last from 11am until 2pm without wanting to go to the hot tub and drink a bucket full of beer! If we can appreciate how lucky we are when we are young, we’ll be able to maximize our vitality and live financially freer when we are older.

With sustainable passive income you can do the following:

* Retire early and travel the world.

* Start a business in a field you are passionate about.

* Find a job that pays less, but is more interesting.

* Stay at home to take care of your family without having to worry about money.

* Volunteer for causes you truly care about.

* Be a big brother or big sister.

* Spend more time with your parents.

* Sit in a coffee shop on a 80 degree day in Paris for hours on a Wednesday afternoon.

* Write the next great novel on the balcony of a cruise in the Mediterranean.

* Eat tapas and drink sangria until 1am on a Monday evening.

* Potentially live longer due to much less stress.

* Experience perfect endless summers over and over again.

There is so much you can do once you generate enough passive income to pay for all your living expenses. I highly encourage everyone to at least try. This post will provide you the framework for passive income success. I’ll also provide an update on my estimated 2013-2014 passive income streams which have grown since retiring in 2012.

The First Million Might Be The Easiest: How To Become A Millionaire By Age 30

Balandra Bay, Mexico VacationGrowing up in a middle class household made me strong. My parents always drove beaters and frowned upon ordering anything other than water when we went out to eat. I knew my parents were not rich because their incomes were in the public domain as foreign service officers. As a result, I made a conscience choice in high school not to attend one of the two private colleges that had accepted me in order to save us money.

We were by no means poor. We just pulled up to parties in a paintless 1976 Nissan Datsun alongside Audis, Mercedes, and BMWs for the four years we lived in Kuala Lumpur, Malaysia between 1986-1990. I was quite mortified as a kid I’ve got to admit. I knew nothing of expensive shoes because I had none except for my wealthier friend’s hand-me-down Jordans that were two sizes too large. I couldn’t even afford a camera or a Nintendo game system. We led comfortable lives, but didn’t have more than we needed.

I was always curious about my wealthier friends. Many of their parents were business owners so one day I told my father, I too wanted to be a businessman. By the time I was 13 I was hooked on every single episode of “The Lifestyles Of The Rich & Famous,” narrated by Robin Leech. A million dollar house and a $40,000 sports car. What a life! I thought to myself in the 8th grade. Might as well give it a go. That’s when I started really hitting the books.

How Much Should I Have Saved In My IRA At Various Ages?

Pool overlooking the ocean. Retirement villa.The IRA is a pre-tax retirement vehicle available to most people who work for an employer and make less than $69,000 a year. If your modified adjusted gross income is $59,000 or less and you do have a retirement plan offered at work, you can take the full deduction of currently $5,500. If you are married, you get to contribute the full pre-tax IRA contribution if your AGI is under $95,000. Deductions are gradually phased out once you reach incomes of $69,000 for individuals and $115,000 for married couples.

If you do not have a retirement plan offered at work (rarer case), the rules are a little different. There is no income limit for individuals, and a full deduction of up to $178,000 in joint income, partial deduction from $178,000-$188,000, and no deduction if joint income is above $188,000. The best thing you can do is ask your benefits department to see if you qualify because the laws are changing all the time.

From 1974 until 1980, the IRA contribution limit for investors was $1500. From 1981 until 2001 the contribution limit improved to $2000. In 2002 the limit was raised to $3,000, again to $4000 in 2005, one more time to $5,000 in 2008 and now to $5,500 in 2013. I don’t know about you, but such low limits are hardly anything to get excited about.

When I graduated from college in 1999, my base income was $40,000 living in NYC. I was considering contributing to an IRA until I learned more about the contribution restrictions. Adding $2,000 to my IRA at the time felt stupid when I was busy trying to max out my 401(k) which had a more reasonable contribution limit of $10,000. Besides, I didn’t want to not be able to contribute pre-tax money to an IRA the very next year just in case I made more than their arbitrarily low income limit.

You’ll discover in this article that even small contributions add up over time. So don’t be stupid like me and not contribute while you still have the opportunity. Make deferring taxes a key tenet in your efforts to achieve financial independence. Taxes are our biggest expense and you want to save more than the government taketh away!

THE CURRENT AVERAGE EXISTING IRA BALANCE

How Do People Live A Comfortable Life Making Less Than Six Figures In Expensive Cities?

central-parkNew York would be the greatest city in North America if it weren’t for three things: 1) Tough weather for half the year, 2) Never ending crowds, and 3) outrageous prices! I’m currently spending the first week of my four week vacation/blogging research tour in Manhattan and I’m blown away by how much more expensive Manhattan is than San Francisco.

I used to live downtown when I worked in finance from 1999-2001 as a fresh college grad. My base salary for the first half of the year (started in July) was $40,000. Even then I thought $40,000 was pretty low as I could only afford to share a $1,800/month studio with a buddy of mine from high school after contributing to my 401(k). Thankfully our salaries were raised in the second year to $65,000 after Wall St. decided to pay new first year analysts $55,000 instead of $40,000. Still, a base salary of $65,000 wasn’t much to write home about when one bedroom condos were selling for 5X.

Fast forward 14 years later and the 600 square foot one bedroom condos in decent areas of Manhattan are now trading for $750,000+! I’m pretty familiar with these prices because my studio roommate actually bought a $325,000 one bedroom condo near the United Nations in 2000. He’s been looking to upgrade to a two bedroom condo with his future wife, but he’s taken aback by the ~$1.5 million price tag. They just might move out of the city instead. If a condo owner who saw his property’s value grow by 130% can’t even afford to comfortably upgrade to a two bedroom, can you imagine what a renter during this same time period is thinking?

LET’S BREAK DOWN A $100,000 TO SEE HOW LITTLE IT GOES

How To Correctly Value And Analyze Investment Property

SF Property BackyardUnlike stocks, there’s no easy way to ascertain the exact value of your current property or the property you plan to purchase. As a multi-property owner I’m glad there aren’t any ticker symbols jumping around every weekday because they are just a distraction. It’s all about buying, maintaining, and holding for as long as possible to build wealth when it comes to real estate.

Real estate currently makes up around 35-40% of my net worth where it will stay for the foreseeable future as I focus on entrepreneurial endeavors. The earnings that came from focusing on my career instead of chasing unicorns in the stock market was largely reinvested in real estate for diversification purposes.

In this article I’ll approach valuing property from an investor’s stand point. We’ll go through some big picture concepts as well as use a real life example to see whether we are making a good or bad investment. I think you’ll love this particular property I’ve picked. If you are already a homeowner, you’ll get to approach valuing your own property with as realistic an eye as possible.

VALUING PROPERTY – BIG PICTURE FUNDAMENTALS

Why It’s Better To Invest In Growth Stocks Over Dividend Stocks For Younger Investors

Growth stocksDividend stock investing is a great source of passive income. The problem is, with dividend yields relatively low at 2-3% you need a lot of capital to generate any sort of meaningful income. Even if you have a $500,000 dividend stock portfolio yielding 3% that’s only $15,000 a year. Remember, the safest withdrawal rate in retirement does not touch principal. Furthermore you must ask yourself whether such yields are worth the investment risk.

If you’re relatively young, say under 40 years old, investing the majority of your equity exposure in dividend yielding stocks is a suboptimal investment strategy in my humble opinion. You’ll be hoping for filet mignon for decades while you eat Hamburger Helper in the meantime. When you reach your desired age for retirement, you might just be asking yourself, “Where the hell is the feast?

Out of the few multi-bagger return stocks I’ve had over the past 16 years, none of them have been dividend stocks. I’m sure dividend stocks will provide over 100% returns if you give them a long enough amount of time. But if you are like me, you’d rather build your fortune sooner rather than later. If I’m going to bother taking risk in the stock markets, I’m not playing for crumbs. When things turn south, everything turns south so there had better be more than a 3% dividend yield and some underperforming appreciation to compensate.

The following article will attempt to argue why younger investors should focus on growth stocks over dividend stocks in a bull market with potentially rising interest rates. In a bear market, everything gets crushed but dividend stocks should theoretically outperform.

A FUNDAMENTAL POINT TO UNDERSTAND ABOUT DIVIDEND PAYING COMPANIES

Welcome To The Financial Samurai Forum (FSF)!

beach-north-shoreDear Readers,

Due to popular request I’ve launched the Financial Samurai Forum where the community can come and share their thoughts in five main categories:

* Investing

* Real Estate

* Career / Entrepreneurship

* Retirement Life / Wealth Management

* General

Financial Samurai has been up for four years now and I’m proud to say we’ve got some of the most interactive personal finance enthusiasts around. Just look at the Most Commented Posts on the right sidebar. We’ve got eager readers who are just coming out of school with so much opportunity ahead of them as well as multi-millionaire readers who are looking to change things up a bit. All of us have something to contribute so don’t be shy.

Since 2009 I know many of you have taken great strides to achieving financial independence which is absolutely fantastic. The core motto on Financial Samurai after all is to “achieve financial independence sooner rather than later.” I’ve learned a tremendous amount from all of you and I hope you have done the same from my writing. Financial freedom seekers this forum is for you!

CATEGORY DETAILS