I don’t know many people who would turn down passive income. After all, a strict budget and thrifty habits will only get you so far. To take things to the next level, eventually, you need to make more money. Making more money sounds easy, but there’s a big problem. Most of us aren’t actually making money. We’re simply trading our time for money, and our time is limited.
To change that, you have to stop trading time for money and begin generating money passively. You have to begin making money in your sleep. There are three key steps to making this happen:
- Spend Money on Assets
- Pay Yourself First
- Take Risks
Below, we’re going to look at these three steps in a little more detail, but first, a little context about why traditional advice doesn’t work like it used to.
What is Traditional Advice?
We’ve all heard the traditional advice at one point or another. Many of us were told some variation of this advice, and each step flowed into the next like some map for our future. We were told we needed to…
- Get good grades so we…
- Get into a good college so we…
- Get a high paying job so we can…
- Provide for our family so we can…
- Save enough to retire.
Times Have Changed
The problem is, times have changed, and for many of us, this map isn’t guaranteed to lead us to the promised destination. According to the Department of Education, the average cost of tuition, room and board, and fees at a four-year post-secondary institution was $9,438 in 1980. As of 2014, that number had climbed to $23,872, and it hasn’t slowed down since. That is a 153% increase! When you realize that for most Americans, real wages haven’t changed much in decades, it becomes easy to see why high tuition is such a limiting factor.
The large spike in education costs means many young graduates enter the workforce with more debt than previous generations. This creates a ripple effect delaying many other big financial milestones like buying a home, starting a family, and saving for retirement. The result? A first in American history: many Millennials are worse off than their parents.
Because the times have changed, it’s harder than ever to save your way to retirement. Realizing this is often the key to pursuing other options and taking the steps below.
1. Spend Money On Assets
In his best-selling book, Rich Dad Poor Dad, Robert Kiyosaki, stresses the importance of knowing the difference between an asset and a liability. Once you understand the difference, you should then shift your focus to spending money on assets.
In his book, Robert says, “The wealthy buy assets, the poor buy liabilities, and the middle class buys liabilities believing they are assets.” This means that many of us are spending money on the wrong things. Every time we do this, we set ourselves back, sometimes a little, sometimes a lot.
The infographic below was adapted from Robert’s book and illustrates how acquiring enough assets eventually removes the need for a job! If you follow the path on the left, you are dependent on your job for income. If you follow the path on the right, your assets provide income without you having to have a job.
It’s plain to see that spending money on assets will result in more and more income over time. The more and better assets you invest in, the more income you will generate.
2. Pay Yourself First
All of us have immediate expenses that aren’t assets. We all need to buy groceries, put gas in our cars, and pay for utilities. Even so, it’s important to pay yourself first, even before you pay for all of your necessities. What does this mean exactly?
For me, it means I fund my asset categories in my budget before anything else. I’ve found it helpful to keep my assets at the very top of my budget. Seeing them first is a reminder to budget money there first before anything else. I also have all my investments on autopilot. The withdraw from my bank account happens the same day my paycheck hits my account and takes that money out of my reach before I have the chance to miss it. This ensures I don’t have a moment of weakness and use my asset money for less important things.
Paying yourself first will keep your assets at the forefront of your priorities and help you continue to make progress all year round, not just during months when you have excess.
3. Be Willing to Take Risks
Don’t settle for what you’ve always had because that’s all you’ll get. There is really no risk-free way to achieve passive income. The stock market has risk. Bonds have risk. Even your job has some element of risk associated with it – you could get fired, laid off, or not get enough of a pay increase to keep up with increasing costs of living.
Every choice has a risk. In fact, even choosing not to act has risks associated with it since you are missing out on a potentially better future.
If you want to stop trading time for money, you have to grow comfortable with risk. If you don’t, it’ll be tough for you to take the leap when the time is right.
Take One Step Today
As a conclusion of sorts, I’d like to challenge you to start today. You’ll never be fully ready. No one can fully prepare for marriage or having kids. You can’t fully prepare to buy your first house or car, move to a new city, or start a new job. Eventually, you have to take the first step and adjust and learn along the way.
Stick with us, and we can help you learn as you go. Your first step doesn’t have to be drastic. You could even start by investing 5% of your income each month online.