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.

To Endless Perfect Summers

Early sun in Monterrey, CaliforniaImagine standing barefoot on the sand just far away enough so the water doesn’t kiss your toes. A flood of orange consumes your eyes as the sun sets over the hills. You give thanks for the moment and hope tomorrow will be just as wonderful. Such is one day out of a perfect summer.

From 1996-1999 I experienced three perfect summers. They were filled with adventure, passion, heart break and learning. I was 19-22 at the time and couldn’t be more excited to experience the world. The lack of money didn’t matter. What mattered was the thrill of the unknown.

My first summer after a year of work in 2000 became a non event. Despite having more money than ever before, I wasn’t able to spend it. Taking more than a week off a year was frowned upon for first and second year Wall St analysts. The good times as I knew them had ended.

For the next 10 years I longed to replicate those carefree, wonderful times. But when you’re doing everything you can to get promoted and make money, it’s very difficult to cut away. I came close in 2011 and 2012 when I took six weeks off to travel, but it still was not the same since the most I could leave would be for two weeks at a time.

I’VE FINALLY FOUND YOU AGAIN

In Search For A Good Travel Rewards Credit Card: Barclaycard Arrival Review

Barclaycard Arrival World Mastercard Sea TurtlesWith my new goal of traveling at least 10 weeks a year, I’ve come to the realization it’s wise to get a credit card whose primary design is to rack up maximum travel rewards points so I can travel even more. I’ve found the card in the Barclaycard Arrival World MasterCard.

Before publishing this post, I had a grand total of one personal credit card – the Citi ThankYou card. I’m not a believer in getting multiple credit cards because I’m all about simplifying my finances. I also pay my credit card bill off in full every single month, so there’s no need to take advantage of those 0% introductory rates. But with my new mission to travel post retirement, it’s only prudent to take advantage of great benefits.

If I got the Barclaycard Arrival before my four week trip to Europe this summer, I would have been able to accumulate over 18,000 awards points! Better late than never because I’m going on another two week trip to attend the US Open tomorrow in NYC. The last time I went to the US Open was twelve years ago and I can’t wait to return!

How Much Should My Net Worth Or Savings Be Based On Income?

Mallorca Sunset Net WorthIf you’ve been making $500,000 a year for a decade as a 40 year old but only have a $1 million net worth, you’re probably a donkey with some serious financial issues. If you’re making $80,000 as a 30 year old but have a $500,000 net worth I’d classify you as a hero who is on their way to bubbles and unicorns!

I’ve written about The Average Net Worth For The Above Average Person that provides charts on where highly motivated people who want to achieve financial independence should be. The only problem with my analysis is that it doesn’t tie income levels specifically in the charts. This post will bind the inextricably important link between income and wealth to ensure as high a chance of financial freedom as possible.

To create a good net worth guide based on income can be very tricky based on variables such as how long someone has been making X income, the return on investment, and the state of the economy. Hence, a more conservative assumption is to replace net worth with savings. Let’s first understand the current state of the world and break down our assumptions.

A Way To Reduce Poor Financial Decisions And Build More Wealth

Sleeping man next to water fountainThings sure felt great at the top of the market in 2007. Stocks were on fire. Real estate could do no wrong. Turning 30 was only slightly depressing for several days. I even remember being surprised at how little then President George Bush was making vs. a third year VP in finance. Then the bottom fell out of in 2008 as Bear Sterns and Lehman Brothers went buh-bye. Friends were getting fired left and right and all of a sudden nobody wanted to spend money anymore.

Things got so bad that I finally stopped feeling sorry for myself as my net worth took a plunge and started Financial Samurai in the summer of 2009. I had been putting it off for a couple years since work was so busy. Writing was a cathartic way of easing the financial pain. Reaching out to others online helped me put things in perspective that the world was still turning despite what the media constantly reported. Eventually the worst passed and we began to recover.

The events of 2008-2009 serve to remind me how incredibly naive and stupid I was to think the good times would last forever. Up until 2008, nothing noticeably bad had happened to me. I got into a decent college, miraculously passed seven rounds of 55 interviews to land my first job, was able to get a promotion to a new firm in SF two years later, made VP in 2005, and finished up my MBA the very next year. What could go wrong but everything.

Remembering poor financial decisions is a great way to counteract frivolous spending as well as minimize greed when it comes to investing. The method I use is called “Financial Mean Reversion,” which states that in order to justify spending unnecessary money, I’ve got to first make up for my spending errors.

SOME DUMB FINANCIAL MISTAKES OVER THE PAST 10 YEARS

Should I Include My Primary Residence When Calculating Net Worth? The Case For Yes

House on cliff in SantoriniThere’s a debate raging whether one should include their primary residence or not as part of their net worth calculations. In my post, “The First Million Might Be The Easiest,” I exclude my primary residence in calculating my net worth figure at 28 because it is the conservative and most accepted way of calculating net worth.

The way to calculate your net worth is a personal preference where so long as you are netting out your liabilities from your assets you’re on the right path. Calculating the proper net worth is all about creating different scenarios that match your risk tolerance and financial goals as we’ve discussed in “How To Better Manage Your 401(k) For Retirement Success.”

It does seem strange to exclude what is likely our most valuable asset from our balance sheet. This post will argue why it’s absolutely fine to include our primary residence when figuring out how much we are worth.

A RENTER’S PERSPECTIVE TO NET WORTH CALCULATION