Generating enough passive income to cover your desired living expenses is the holy grail of personal finance. The problem is, the goal post keeps moving thanks to inflation and life. This post explores what is considered passive income so we can remain disciplined on our journey to financial independence.
I've been trying to build passive income since 1999 when I first graduated college. I knew when my boss told me to get in by 5:30 am that I wouldn't be able to last for decades in finance.
It wasn't until around 2017 that I felt I truly had accumulated enough passive income to take care of my wife and son.
However, after my daughter was born in late 2019 I once again felt more pressure to provide. My family planning forecast only assigned a small chance we'd have another child due to our advanced ages. It’s funny how life turns out sometimes.
Then, when the government started unleashing trillions of stimulus in 2020 and 2021, the feeling of having accumulated enough began to fade. With volatility back and interest rates getting compressed, the desire for more capital as a safety buffer increased. In addition, the income-generating potential of various assets are under pressure.
We've already seen a slow decline in P2P lending returns, bond interest rates, CD rates, and savings rates. Stock dividend yields and real estate rental yields might not be too far behind. Although, thankfully, interest rates are ticking back up and buying rental properties today is my favorite investment.
When it comes to personal finance, you never want to get too complacent. It's important to always try and anticipate the future.
What IS Considered Passive Income: Passive Income “Cheating” Grows
Given it's becoming more difficult to generate enough passive income, the natural tendency is to start “cheating” on what is considered passive income. For example, some have begun to include all their side hustle income, such as delivering groceries, as passive income.
You're seeing this cheating phenomenon occur with the creation of various definitions of FIRE. Back in 2009, there was only one definition of FIRE: when you have enough passive income to cover your desired living expenses.
Today, people have become impatient. Instead of following the definition of FIRE, people have made up new definitions of FIRE. A couple interesting ones include:
Barista FIRE: Where you're working a low-paying job that at least pays for healthcare to help make ends meet. If you’re struggling to make ends meet, perhaps you aren’t financially independent.
Wife FIRE (WiFI): When you say you're retired, but you're really just living off your working spouse. Stay at home mothers don’t say they are retired when they have a working spouse, so why do men? Fascinating.
I get it. We want things and we want them now. Instead of toiling away for years, we want to graduate college and go straight to the corner office. When we see our friends or peers getting ahead, we want to keep up! This is just human nature.
However, I encourage you to stay disciplined. The only person you're really cheating is yourself.
What Should Be Considered Passive Income
Passive income should require little-to-no-work to generate. The less work the better. I say if you are spending more than one hour a week on average to earn investment income, it should not be considered passive income.
Younger investors may find one hour a week to be too stringent. While older investors may more likely agree with my one hour a week maximum criteria.
In addition to spending little-to-no time on generating passive income, you should also aim to not have to think about your passive income. The less mental real estate your passive income sources take, the better.
Ideally, you want to be constantly surprised when receiving passive income. For example, only when you get a rent check do you remember you own that rental property. This way, you know the investment is truly passive. Your surprise also reflects your sound spending habits.
Finally, it’s best if passive income is reoccurring. You may only get a one-off payout from a particular investment. But if you get reoccurring one-off investments from various investments in that asset class, perhaps those payments can be considered passive income
Favorite Passive Income Sources
I've currently ranked stock dividends as the #1 passive income source partly because there is no work involved. However, if dividend stocks tank again, it may lose its #1 spot due to a decline in its Volatility score.
Less volatility and a steady income stream are the reasons why I have real estate as one of the best passive income sources. But owning physical real estate takes work, which is why owning real estate is more a semi-passive income source.
The solution I've found to owning a less volatile and higher-yielding physical asset with no work is through real estate crowdfunding. However, individual real state crowdfunding investments can also get crunched as we are seeing with hospitality commercial real estate during COVID-19.
My favorite real estate crowdfunding platforms are:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
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, higher rental yields. They also have potentially higher growth due to job growth and demographic trends.
I've personally invested $810,000 in real estate crowdfunding since 2016 to diversify my investments. It's nice to earn income 100% passively as I spend more time taking care of my children.
The more passive the income source, the more I tend to like the asset class. As we get older, our free-time gets diminished. When I was in my 20s, I enjoyed screening for tenants and maintaining my rental properties. Today, I just don't have as much time or energy with two young kids.
Real estate crowdfunding is considered one of the most passive types of passive income.
Blogging Is Not Passive Income
Some have asked why I haven't included blogging as part of my passive income rankings. The answer is clear: these posts don't write themselves! Blogging and making money online is not considered passive income.
It often takes hours to come up with a topic, write a first draft, and revise it multiple times before publication. Even after publication, there are often errors that need fixing. Then I've got to filter through all the spam comments and answer questions.
You can even get carpal tunnel if you write too much. Therefore, I'm trying to pace myself. The only thing I include from online income is my severance negotiation book proceeds. The book is updated once a year and sells itself.
To make blogging passive, I would have to pay for an editor and hire a bunch of freelance writers. Many have done just that to great success. If I start to burn out and lose interest, I will likely do the same.
Easier Passive Income Streams
With the increasing difficulty to generate enough passive income, you might wonder whether stock sales and other financial windfalls count as passive income.
The longer you spend investing, the more of these potential windfalls you might start receiving.
I used to think stock sales and other financial windfalls didn't count as passive income, but now I'm not quite so sure.
Like I said, the desire to cheat and include new sources as passive income is increasing!
A New Source Of Passive Income: Stocks Sales And Financial Windfalls
Given passive income should require little-to-no-work to generate, a stock sale or a financial windfall may be considered as a passive income source. A stock sale only requires a couple clicks of a button. A financial windfall tends to just fall in your lap.
Let's discuss each potential new source of passive income using some recent examples.
Stock Sale As Passive Income
Thanks to a bull market, many of us have stocks that have appreciated greatly in value. To increase my chances of holding onto my wealth, I've often taken some profits and bought real assets.
Recently, I sold some Tesla stock. I did nothing to help the stock appreciate in value. I rode the rocket ship passively. Then I took some of the profits to pay for a ground floor remodel at one of my rental properties.
I never would have invested in Tesla if I hadn't joined a Meetup Softball league several years ago. Therefore, all the gains didn't feel real. They felt completely passive and free.
For as long as I shall live, I plan to keep taking some stock profits to pay for a better life. My plan is to always stick to my desired net worth stock allocation to feel more at peace no matter the economic environment.
Investing in a stock that pays dividends is considered passive income. Why isn't owning a growth stock and selling it for a profit not also considered passive income?
The only way you can realize any gains on a growth stock is if you sell. Therefore, an argument can be made that selling a stock for profit can be considered passive income.
Related: Why I'd Rather Own A Growth Stock Versus A Dividend Stock As A Young Investor
Venture Capital Investment
I've been on record saying Just Say No To Angel Investing. Without connections, you will likely end up losing money. The rich and connected tend to get the best deals. The rest of us are left with scraps. Oh the stories I could tell you about how allocations of hot private rounds continue to go to the people who already have the most.
Back in 2014, two years after leaving my day job, I did some part-time consulting for Personal Capital, my favorite free financial app.
I used their product and I was interested in fintech. I also wanted to learn more about online marketing, given I ran a personal finance site. Personal Capital offered a decent consulting wage and they had an office in San Francisco. Therefore, I figured why not join them.
The gig lasted on and off for about 18 months until the latest CMO decided to switch things up. She wanted a permanent hire instead of a freelancer. The irony was that the CMO only lasted six months before she joined another firm.
I was fine with moving on because I had already gotten my fill of the startup world. I had learned what I wanted to learn and had helped the company grow its affiliate business. In early 2015, I had helped my wife successfully negotiate a severance. Therefore, we were ready to do more international traveling again.
Upon my exit, I had a nice conversation with Bill Harris, the Co-Founder of Personal Capital. He offered me shares in his firm. I took him up on the offer and decided to buy them within 60 days of my departure.
A Surprise Passive Income Windfall
It wasn't a lot of shares, but it was nice to own some equity in a company I believed in. If the company was one day sold, I wanted to be invited to the acquisition party.
Well, it turns out five years later on June 29, 2020, Personal Capital was sold to Empower Retirement in a deal worth up to $1 billion! Dang, I wish I worked there full time for many more years so I could have received many more shares!
I thought I was going to make up to a 100% return on my investment given I thought I had gotten shares when it was valued at ~$500 million. But it turns out my memory was off because while I was consulting, Personal Capital was valued closer to $275 million. As a result, I made a 300% return instead.
In my mind, the extra 200% return is a financial windfall. In fact, perhaps the entire 300% return plus principal can be considered a windfall given private equity investments often don't work out. Funny enough, I didn't even remember investing the money until the purchase announcement was made.
If you don't even remember you made an investment years ago and you suddenly get a chunk of change in your bank account, it sure feels like passive income to me.
With this financial windfall, I plan to buy Moose, my SUV, two new 22″ tires. I'm also going to buy an inflatable pool and put it on our deck because it's going to be hot for the next three months.
Your One-Off Gains Will Continue To Come
After over 21 years of investing for passive income, I've come to realize that one-off financial gains will keep happening on a regular basis.
Let me demonstrate how one-off financial gains could turn into a regular passive income source:
- Year 1: One of your private equity funds has a nice distribution of $30,000
- Year 2: One of your real estate crowdfunding funds has a random $4,248.03 distribution in August after a $9,714 distribution in May 2020.
- Year 3: You take $40,000 in profit on a stock that has gone up massively to buy your baby some new Gucci diamond shoes
- Year 4: You sell a minority interest in your business for $500,000
- Year 5: An angel investment in a gin company gets sold and you collect $97,000
- Year 6: As part of your severance package, you get to keep 100% of your $40,000 investment in a distressed asset fund that pays out $120,000 in seven years
If you don't have a diversified net worth, then you might not have these one-off financial windfalls. For example, if your entire net worth consists of 50% dividend stocks and 50% your primary residence, then you're likely only going to earn dividend income and the occasional stock sale proceeds if you decide to de-risk.
Having a concentrated net worth is fine if you can stomach the volatility. However, if you're interested in receiving regular financial windfalls, then a diversified net worth is necessary.
Side Benefit Of Private Investing
One of the fascinating things about investing in private funds and private equity is that after a couple years, you tend to forget you even made these investments. Yes, you'll still get quarterly or annual updates. But once you make a private investment, the tendency is to write off the investment.
Then usually, years down the road, you'll end up receiving distributions and principal back. Because you've written off these investments from your mind, all the money you receive from these investments feels like gravy.
Perhaps a good analogy is paying into Social Security for decades. Then one day, when you're in your mid-60s, you start collecting a nice income stream. Even though you paid into the system, the money feels like a nice windfall, especially the longer you live.
Future One-Off Passive Income Streams
I don't know what my future one-off passive income streams will look like. However, I do know these one-off passive income streams will continue given I've got investments in various funds.
All I know for sure is roughly how much capital I have left in each of these funds. From there, I can assign a probability of how much of the principal will be returned.
It is important to accurately predict your passive income if you want to minimize taxation and maximize your happiness. Make sure you review your passive income sources each quarter and keep track.
In conclusion, I don't think it's wise to model any potential financial windfalls into your passive income forecasts. If you do, that's kind of like modeling an inheritance or government stimulus checks as passive income.
It's best to just tally up your quarter passive income and estimate what the next quarter's passive income will be. You could annualize the quarter to get an annual passive income estimate. However, even that might be too aggressive since dividend payments or windfalls can be erratic.
Related: The Top Passive Income Investments, Ranked
Manage Your Passive Income Better
The best way to manage your passive income is by signing up with Personal Capital. Is is a free online tool which aggregates all your financial accounts on their Dashboard. This way, you can see where you can optimize your wealth.
Utilize Personal Capital's Retirement Planning Calculator. It uses real data to come up with various financial scenarios based on Monte Carlo simulations. There's no rewind button in life. Get your finances right the first time.
So I ask all of you again, what is considered passive income? If you're regularly getting “one-off” financial windfalls from your investments, should they be considered passive income? If you do consider these one-off windfalls to be passive income, how would you model your future passive income streams? Is selling a stock for profit considered passive income?
Long story short – I bought a dilapidated house around 2007. Put a bunch of money into fixing it up, and was under water. Rented it out and bought a new place. Now, am selling to my long term tenant. I will have a “once in a lifetime” windfall of maybe $100k – I’m in my 30’s, and have young kids. My primary home’s mortgage is around 2% and only about $60k, so it probably makes sense to leave it be. No other debt. Where the heck should I place this windfall??
Here you go: https://www.financialsamurai.com/ideas-reinvesting-proceeds-home-sale/
Thank you! As a long time listener, first time caller, I *knew* you would have some neutral places to begin! I like real estate…stocks are something I flat out don’t understand. I definitely feel called to tithe a portion of the proceeds…my inner voice has always guided my largest decisions. Anywho – thanks again for blogging; I enjoy your perspective
When it comes to passive income, I will choose less volatile investments like real estate over stocks. The volatility in investment classes like stocks creates so much anxiety and could end up causing so much pain to the investor. People should invest only the amount of cash they are able to lose without so much heartbreak in stocks, with the exception that they are highly skilled players in the market. Thank you for this article which like your other ones has been extremely useful
True, much of the time. But as I get even older, I like not having my past real estate rental holdings to worry about. Also, no Coronavirus rental payment issues to confront. Get enough stock, and downturns are tolerable. In old age, future net worth gains are not as important.
One my best/consistent passive income sources are music royalties. I buy the royalty cash flows from the songwriters and/or producers via RoyaltyExchange.com. This income is truly passive – zero work. I buy the investment then collect the cash flow for anywhere from 10 to 70+ years. I am earning on average about 17% on these investments. I had one that reached 50% when streaming (Spotify, Apple Music, Amazon, etc) took off and royalty payouts followed the trend.
Great idea and something I should look into. Maybe you’d like to write a guest post on FS on how to invest in music royalties.
I will second that opinion on royalties. I have averaged over 13% since I have been investing in them over 3 years ago. After the initial leg work of knowing what royalty assets to buy, there is literally no other work to do. You just wait for the deposits to arrive monthly/quarterly.
-Jack
Thanks for a great article!
I have a question and would love some opinions on it because its a hard decision!
My husband is an associate at a firm that is not publicly traded but he can buy shares in (up to 100 shares/yr at the associate level). 100 shares right now works out to about $4500.
Now as to whether its a good investment! The cons are: no dividends, we may miss out on better returns, we will lose $ if the company goes bankrupt (not a huge worry for us, it is a large well known architecture firm, pretty conservatively run), we can’t get the $ back until he leaves or retires.
The pros: the company may do great, buying more may show his commitment to the company and make him a principal faster, he has been told stock shares can effect his bonuses but we are not 100% sure on that, it would force us to save $ that doesn’t get spent until perhaps retirement.
If anyone has any advice I would appreciate it.
I missing a lot of information from the question. For example, what is the price discount for your husband? What percentage of your net worth is in the company stock? How long does your husband plan to be at the company and does he believe in the company long-term?
There is no discount, it would be 2.5% of our net worth. He plans on becoming a principal eventually and believes in his company for sure. Though, once a principal he has to buy at least 5k in stock a year, although our net worth will have grown by then.
Sam – I have been investing in stocks for over fifteen years. This, in my opinion and to some degree, is the real passive income maker. No chasing renters, no repairs, no roofs to change, no midnight calls that there is a bathroom leak. Keep in mind I also own a rental property and it is somewhat passive but if you are doing the property management it can get to you after some time.
The trouble with investing in equities and bonds is that you have to keep cool always, even in economic cycles and bull and bear markets. People react to newspapers and TV headlines. These folks are in the business of selling bad news with advertisements from their sponsors. That is the issue with the stock market. People pull the trigger at the wrong time or try to time the market. Remember the tech bubble and the day traders? I know attorney friends who have lost over half a million dollar back in 2008 thinking that because they are “attorneys” they are smarter than the rest of the people, including Wall Street traders. Never. Can’t beat a Wall Street guy. $$$ is not the only thing these guys lost. Wives are gone. Women want security not someone who will lose money thinking they are smarter than the rest of the world.
Find a few good dividend-paying stocks and just sit back and wait. Time is your friend not your enemy. Don’t go buying penny stocks either. That is foolish.
I must admit, I am trying to move more of my portfolio into real estate but I am waiting for a drop in 2021 and then go shopping for bargains. Buy low sell high. Remember your days in Wall Street?
The Economy Chief
Sounds good. I’ve got a lot of cash sticking up for real estate deals as well. But they are very hard to find given the low mortgage rates, and Way more time being spent at home.
We might be waiting for a very long time to get any real estate deals.
Hey that’s so true about how more people are cheating themselves by considering some of their active income as passive. I’ve noticed that too.
I’m a set it and forget it type of investor, so I definitely consider my dividend earnings as passive income. Back when rates were good I also had passive income from CD interest, but I don’t have any active CDs right now. I have some rental income that’s typically passive, but lately I’ve been having issues with the property management company, so it’s not as passive as I would like. Hopefully they will get their act together soon with me hounding them. Otherwise I may have to consider finding an alternative management company. This is why REC is great – exposure to RE without the hassle of dealing with people and problems.
It is an interesting phenomenon, cheating in personal finance. I think we’re just all tired, which is why I wrote this post. Instead of trying to amass a lot more capital to reach a new passive income goal, want to just include these windfalls and call it a journey.
Ahhh…
Passive income is a hot term, for those stuck in a boring route. Also, it’s hard to leave behind money worries and change path. It’s hard for many if not most, just to live “in the moment” and be calm, rational and worry-free.
But you’ve made it Sam, with one million readers per month. I definently had considered outsourcing, all of the writing through quality filipino writers.
It wouldn’t be as fun. But maybe one day. I think supplementing the writing with a new voice once a week is a good idea. But again, blogging is not passive.
I do hope more people find ways to make more active income at home. It is absolutely a no brainer. If you’re not gonna do it now during a pandemic, then when? The answer is never for most.
Even then, I don’t think it would be “passive”. Your job would just shift to managing the people who you’re outsourcing the work to. Plus continue to look at analytics, think about your strategy, etc. With the right people, I suppose it could end up taking less of your time though. Personally, one of the pleasures of having a business like yours would be that I dont have to worry about managing other people.
Maybe. It depends on how good the hires are.
But yes, the main reason why I haven’t hired anybody to help me is because I really love the autonomy and the celebrity of making decisions. I can get things done 3 times faster by myself than working at a company. This is how I came up with the ideal number of hours a day to work: four.
That said, there is a limit to how much I can do to grow. So if I want to grow faster and larger, I would have to hire some people. Within that would feel like work. Right now, my writing does not feel like work if I stick to 3X a week. That’s when I start emptying it up that it becomes less fun. So this is how I came up with my three times a week cadence as well for the past 11 years. Everyone has to find their own cadence.
Unless you’re reading a ton of information and analyzing data, stock transactions should be considered passive.
For real-estate, unless you’re managing/maintaining the properties and dealing with tenants yourself, the income should be considered passive.
One of my favorites, it sure sounded like shrwed Sam from start to finish.
What a great argument for diversification too.
Congrats on taking profit on Tesla. I’ve been wondering when people would start selling shares. I am not sure stock sales are completely passive. Most investors who buy shares in individual companies spend a lot of time researching positions.
I agree, passive investments like ETF’s are completely passive.
It’s not active vs passive . . . it’s a range from more than full time to very little — but I would argue truly passive is a definitional label, not a actual label. I like the metric of 1 hour per week being deemed passive, but for me it’s more like 1 hour per month. If I am spending an hour a week on every investment / activity / net worth allocation, I’m nearly working full time. But nothing (for me) is truly set-it-and-forget-it over the long term. Paying others to do our active work so it can be more passive is an interesting concept, but only works when others have a greater expertise and effectiveness than they cost us. I long ago gave up active investment advisory services and then even actively managed mutual funds for this reason. Conversely, for short-term resort rentals, I employ a management company. The lower returns more than offset my time given their focus, flywheel and economy of scale. But, even this is not truly passive. It’s just more passive. :-)
Sam,
Great info as usual. I consider my monthly military retirement (taxed) and monthly VA compensation (which is tax free) as passive income. An old saying from many senior personnel in the military before direct deposit was they were looking forward to saluting the mail box on the 1st of the month when the retirement checks would arrive. I also consider my 4 rental properties as passive income as well. The hardest part of my day is deciding if I’m going fishing, hunting or golfing. I also flip homes w/cash when the opportunity arises, but I contract out the work, coordinate and supervise. It is getting harder to find flips in this market though, but I don’t have or need to flip homes. At 52, life is good!
Yes, a pension is definitely one of the best passive income sources of her. It is finding a pot of gold at the end of the rainbow.
Congrats!
Thanks for the post, Sam! I am trying to build up my passive income as well. I have one about asset allocation. As someone in their mid-20s, what percentage of net worth is too high for investing in alternative investments (private investments), like Fundrise? I know the Yale Endowment model states that around 20% allocation toward alternatives can decrease volatility and increase returns, but does that also apply to a young individual? What are your thoughts on percentage of net worth being allocated to alternatives by age? Thank you!
I would shoot for 10% to start with. If you understand and like these investments, you can move up to 20% of your net worth. But I always start small and gradually move your way up depending on what you are comfortable with.
Gambling is my favorite passive income. I have a set amount I figure I’ll lose every year. Sometimes you hit a long shot and that money is better than any stock sale I ever had. It truly feels like free money.
Hmm, Unless you are the god of gambling, I disagree that gambling income as a source of passive income. Passive income needs to be reoccurring, many times, bad bets are placed.
Tell me your game and gambling secrets!
My secret is, I always expect to lose. When I did a budget gambling was one of my expenses. When I win I look at it as free money.
Its kinda like a tax return. I try to estimate my taxes to get a 0 refund. When I get money back it feels free.
I often see dividend stocks mentioned, but rarely see high yield dividend funds come up in those conversations. Do you have any thoughts on those – e.g. Cohen & Steers Infrastructure Fund has a dividend yield of 8%. That is well above the typical 4% safe withdrawal / FIRE funding required…Eaton Vance Municipal Income Trust is showing 4.5% dividend yield
Same category, dividend stocks, and dividend Funds.
Hi Sam,
First of all, I would like to share how much I appreciate your articles, newsletters and insights. You provide a valuable source of information for people. Keep up what you are doing.
I am writing in response to the backlash of comments you’d shared that you’d received about the secure and well positioned financial position you and your family are in. I think it’s GREAT!!! And you should be commended and give yourself a pat on the back.
Don’t let the jealous people and the haters get to you too much.
The higher a person rises, the more attack they seem to attract. It is because you are going somewhere.
And that is a very good thing!
You are being what you talk about: a successful entrepreneur, a great husband and a great father :).
Should the rest of the entrepreneurs who write & sell actually be all those things…
I have a request for continued valuable content…
For the majority of us still trying to catch up to you, maybe as an experiment, start writing articles for the majority as if you had to do it all over again, show us a a FEW DIFFERENT ways on how you would rebuild careers, finances and assets during this crazy pandemic year.
I would love to read about your insights and problem solving solutions that you are so good at.
You are much appreciated.
Warm Regards,
Ruth S. Chao
Hi Ruth!
Thanks for your comment. Don’t worry about me, I’m having a lot of fun still. If I stop having fun, I will change the type of content that I write to be more bland and search engine focused. It’s actually a good idea for the long term, with much less work required.
What I’m discovering is that there really is a deep lack of financial knowledge by some of the people who are most opposed to my views. Or example, I have no idea people do not understand the relationship between the risk-free rate of return and risk asset returns.
So do what you’re saying, I think it’s a good idea to go back to basics. It’ll brought in the audience, potentially grow readership, and therefore generate more active income as well. So it’s a triple win!
Thanks for reading and sharing my work.
Sam
I would for sure include the sale of an investment as passive income if it wasn’t something that required active management. That said, I consider almost all income derived from investments whether dividend, interest, or a realized gain as passive income. That said, the majority of my investments are “set and forget”…except I never actually forget about them, instead, I just let them do there thing.
I’ve personally come to really prefer illiquid investments like private equity or Crowdfunded RE over extremely liquid Investments like stocks. The lack of liquidity forces discipline and minimizes taxes by way of longer holding periods leading to capital gains tax treatment.
I don’t publish nearly as often as you do but I do consider blogging a form of passive income because it is a side be oof blogging and not the purpose of my writing (it’s peanuts compared to what you earn on this site).
Windfalls of all varieties by definition should be considered passive.
Well, if blogging is considered passive income, then I might as well give up my passive income journey because we got there years ago.
However, blogging is definitely not passive based on my frequency. If I cut my writing frequency down to once a month, maybe I will reconsider.
Thanks for a great article!
I have a question and would love some opinions on it because its a hard decision!
My husband is an associate at a firm that is not publicly traded but he can buy shares in (up to 100 shares/yr at the associate level). 100 shares right now works out to about $4500.
Now as to whether its a good investment! The cons are: no dividends, we may miss out on better returns, we will lose $ if the company goes bankrupt (not a huge worry for us, it is a large well known architecture firm, pretty conservatively run), we can’t get the $ back until he leaves or retires.
The pros: the company may do great, buying more may show his commitment to the company and make him a principal faster, he has been told stock shares can effect his bonuses but we are not 100% sure on that, it would force us to save $ that doesn’t get spent until perhaps retirement.
If anyone has any advice I would appreciate it.
Debbie,
Age and income play a big factor into this as well as how long he’s been at the company. If he makes $60,000/year at 47 and is the sole earner while you stay at home with 3 kids, that’s a lot different than if you’re both 28 and your combined salaries are $300,000/year. Losing $4500 is often a big deal in many households.
One school of thought is that “if you never try to get rich, you won’t get rich”. Very, very few people accidentally end up with a lot of money. That being said, $45/share seems pretty high for a company that isn’t public.
I suggest your husband find a trustworthy mentor at work to give better suggestions on how to handle the stocks because it seems like there are some politics at play there.