There's active income and then there's passive income. If you want to achieve financial independence, you've got to build as much passive income as possible to covered your desired living expenses. However, I believe active income is much more enjoyable than passive income.
Making money while not doing anything is the ideal scenario, or so I thought until recently. For years I've been diligently saving and investing so I could never be told what to do for money again.
5am conference call with the East Coast? No thanks! Fly to Chicago in the middle of winter to see clients? Have fun! Come in before sunrise and leave after sunset? Yeah, you do that.
Building Active And Passive Income
One of the most important tips I've shared about building sustainable passive income is treating the whole process like a game with multiple levels. Because interest rates have been coming down for the past 30+ years, generating low risk passive income is becoming that much harder every year.
Earning $20,000 a year in dividends on a $1 million dollar portfolio is not exactly living it up! “Thankfully,” interest rates have increased and one can now earn over 4% in risk-free income buying U.S. Treasury bonds. In general, the investing world is counting much more on capital appreciation instead.
The problem with building passive income my way is that you start becoming completely oblivious to the income production because you aren't utilizing the money. Most of the time, your passive income is just getting reinvested to generate more passive income.
I haven't touched any principal or interest/dividend income since I started the passive income journey in 1999. I've become an over saver during retirement, which is not bringing me joy any longer.
The problem with over savers is there's this irrational fear that Doom is right around the corner. I mean, who would have expected a global pandemic screwing up our lives in 2020 and 2021? Not me! And then, of course, it was back to bear markets in 2022 thanks to aggressive Fed hikes crushing the global economy.
As someone who no longer has a day job, staying paranoid is important to plan for bad things. For example, what if Google's latest search algorithm changes cuts this site's traffic in half? Less traffic means less income. What if the bull market finally stops in 2021+? Ah hah, it finally did.
Why Active Income Feels So Much Better Than Passive Income
I'd like to give you a specific example of how active income feels better than passive income.
Just the other day I scored a small ad deal for $400. After about eight back and forth e-mail negotiations over a couple days I locked it down and was thrilled. I decided to take a friend out for a steak dinner to celebrate to the tune of $140, or 35% of what I made from the deal.
During this time period I got a monthly electronic rental payment of $4,200 from a tenant like clockwork. You'd think that receiving a sum 10X the amount of the ad deal while doing nothing would provide a little more happiness. But I didn't feel a single thing. Nada. Zip. Zero. Mei you.
I used the $4,200 to pay my rental mortgage and HOA and still had $2,300 left over to spend on whatever. I saved and invested it of course.
Another thing happened during the time I negotiated an ad deal. One of my long time holdings in my IRA portfolio reported decent results and the stock went up $6,000 the next day. I was excited for about an hour and then nothing afterwards. Of course the stock should trade higher because it was undervalued, I thought to myself. Who was the dummy actually selling?!
It's strange to feel so much more joy over the $400 ad deal than the $10,000 in passive income. Let's discuss why.
Why Active Income Is More Rewarding Than Passive Income
1) We want to know our actions make a difference.
After earning a certain amount of sustainable income to survive, making more doesn't feel that good if you haven't done anything to deserve it.
I've spoken to a number of people who've married into very wealthy families or have trust funds. There's always this very evident insecurity about them that they need to prove themselves worthy. It's much better to build something from the ground up and make your own fortune than inherit one.
For my stock that went up $6,000, all I did was make a decision six months ago to buy. Everything else was left up to the management and the markets. I'm a minority investor with no sway over the future of the company.
Minority Investor Is No Fun
On the other hand, I'm also a minority investor in Bulldog Gin, a private company headquartered in NYC which recently signed a huge distribution and partnership deal with Campari. If Bulldog Gin gets sold to a spirits giant like Diageo for mega bucks, I feel I've made a difference because I not only consumed lots of Bulldog Gin and tonic on my business trip to Mallorca, I also did an interview with the CEO here which helps with publicity through search traffic.
Cementing $400 in an ad deal is a small portion of my online income, but it gives me the most amount of pride because if I didn't do anything, nothing would have happened. Creating something that didn't exist before is one of the greatest feelings ever. Here's an article to learn how to be a better creator.
Even though the Yakezie Network is not a big money maker, I'm happy to run it forever. Just several years ago no such network in the personal finance blogosphere existed. The worst case is that I've got to spend some money and time maintaining the site from crashing, getting to know new bloggers every day, and helping others achieve their online goals. Not bad.
Knowing our actions make a difference is the number one reason why active income feels so much better than passive income. Although it takes active energy to first create passive income, you no longer feel you deserve receiving the money after a period of time.
2) We want to test our limits.
Money really doesn't matter after a certain amount. Some researchers say making anything more than $75,000 doesn't make you much happier. I say making anything more than $200,000 doesn't make you much happier.
I think I have way more credibility than the $75,000 a year earning researcher who has never made much more than $75,000. I've made crap working at McDonald's and large sums working on Wall St.
Instead of making more money, it's all about the challenge as many entrepreneurs and investors will attest. This is why you see a lot of high powered jobs with healthy compensation packages look for ex-athletes and ex-military. They've got the combination of collaboration and drive.
Making Six Figures By 25
I had a goal to make six figures from an occupation while I was in high school after one too many crap jobs making $4 an hour. Never again did I want to flip burgers or break my back moving boxes for a living again. Once I achieved the six figure income mark, I wanted to see if I could make six figures passively through investments. And once I achieved the six figure passive income mark I decided to see if I could earn six figures through entrepreneurship.
I didn't want to think that the only reason why I was able to make six figures is because I got a lucky break by joining a bulge bracket firm out of college. I had to test my limits to see what I could do on my own.
3) We want to feel like we're maximizing our potential.
Nothing is sadder than seeing someone with so much potential achieve nothing due to a lack of effort. If you're 8 feet tall you better try out for the NBA and make your millions! If you can play Mozart conciertos by the age of 3, then hopefully your parents push you to be a world class musician without pushing you into madness. I think the majority of us wished our parents pushed us harder growing up. This is even though during the time we hated every minute of their discipline.
Thankfully, I'm neither tall, handsome, gifted, patient or very smart despite what my mother says. As a result, I don't think my parents expected anything great from me except to be happy.
The only thing I have inside that might be higher than average is focused intensity. Due to my very average expectations ever since senior year in college, I'm easily satisfied with what I have. But I'm always wondering whether I've pushed myself hard enough to maximize my potential.
I decided to see if I could get a multiple six-figure book deal after I wrote my Wall Street Journal bestseller, Buy This, Not That. I also have a challenge of trying to make my next books even better. Maximizing potential as an author is fun!
Passive Income Is Great, But Don't Get Lazy
Generating enough passive income to live a good life is wonderful. But take it from someone who has seen both sides of the active and passive income spectrum. You'll get bored of your passive income streams eventually. You'll long to start generating active income again because it feels so much more rewarding.
Wanting to see if your actions still matter is the main reason why folks who've retired often don't stay retired for very long. Earning social security, pension money, and dividends is not fulfilling even if it's a result of a lifetime of hard work. Sometimes you just want to know whether you've still got it.
As a result, I took on the endeavor to write a bestselling book called, Buy This, Not That. Even though writing doesn't pay well, it was a challenge during the pandemic. The active income generated from the book in the form of a book advance was nice. But I see it as a side product of a rewarding professional goal.
Once you generate enough passive income, you can take on more active income without trying to optimize your income. Instead, you optimize doing the things you love to do that ends up generating active income. That, to me is the best way to earn.
Passive Income X Factor – Online Media Company
I started Financial Samurai in 2009 and I'm now earning a good amount of semi-passive income stream online. The top 1% of all posts on Financial Samurai generates 31% of all traffic. The average age of the top 1% posts is 2.3 years old. That's passive income.
Although active income is more rewarding, I've got to say that making money passively with posts I wrote years ago feels fantastic. If you enjoy writing, connecting with people online, and enjoying more freedom, see how you can set up a WordPress blog in under 30 minutes. Who knows where your new adventure will take you?
Earn More Passive Income Through Private Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
The combination of rising rents and rising real estate prices builds tremendous wealth over the long term. Meanwhile, there are more ways to invest in areas of the country where valuations are lower and net rental yields are higher thanks to crowdfunding.
Take a look at my two favorite real estate investment platforms.
Fundrise: A way for all investors to diversify into real estate through private funds with just $10. Fundrise has been around since 2012 and manages over $3.3 billion for 400,000+ investors.
The real estate platform invests primarily in residential and industrial properties in the Sunbelt, where valuations are cheaper and yields are higher. The spreading out of America is a long-term demographic trend. For most people, investing in a diversified fund is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. These cities also have higher growth potential due to job growth and demographic trends.
If you are a real estate enthusiast with more time, you can build your own diversified real estate portfolio with CrowdStreet. However, before investing in each deal, make sure to do extensive due diligence on each sponsor. Understanding each sponsor's track record and experience is vital.
I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Wealth Building Recommendation
Stay on top of your money with Empower. It is a free online money management tool that allows you to track your net worth. You can manage your budget and analyze your retirement portfolios too. Empower will even e-mail you a weekly net worth snapshot. I use Empower mostly to make sure my assets are properly allocated based on my risk tolerance.
Their best feature is their Investment Checkup feature which analyzes your risk and highlights excessive portfolio fees. I found out I was paying $1,700 in fees per year I had no idea I was paying! Empower also has a sweet Retirement Planning Calculator. It uses real-time data and Monte Carlo simulations to produce some incredibly dynamic and realistic results.
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