Financial Freedom Through Passive Income

Are you thinking about how to build financial freedom through passive income and wondering where to start? As with other things in life you can’t just wake up on day one and run a marathon. You need to take small steps and build up over time. Let’s break down how you can eventually get that financial freedom step by step.

The term financial freedom gets used a lot, almost to the point of it being overused and misunderstood. The meaning of financial freedom in my view is: to not worry about money. This seems to be the image behind a lot of retirement and investing strategies out there, however from all those I know that follow traditional financial planning ideas, nobody actually reaches that goal. Those I know that build passive income, do achieve that goal. Here are the steps:

1. Free up cash flow

We all make mistakes. When starting out earning money we almost all spend it on things that are not important. Often times we build up monthly expenses (or debts) that keep us trapped in the cycle of going to work just to pay our bills. We know we should save, pay off debts, invest, etc. Yet we are new to this money game and are just having fun.

Step 1 is to let go of old habits of blowing your money unwisely and having more discretionary income to use. This can be done by paying off high-interest credit cards, possibly refinancing a mortgage to a better interest rate, or maybe selling off extra toys or vehicles that barely get used.

It’s hard to begin building up savings when you are always strapped for cash flow much less begin investing in assets that generate income. Sometimes just doing a cash flow analysis to free up cash flow is all you need to move on to step 2. Though this step can be done in conjunction with step 2 as well, it really depends on how much your payments are as far as how to best leverage the income you have the fastest (we do a free cash flow analysis if you’d like to get a fresh view on the matter).

2. Build up savings

Most of us are in the habit of going to work and then spending just about all if not all that we get from a paycheck. We hear all the time that we should have savings account for a rainy day just in case, yet how often do we actually do that?

Not only does building up a savings account help for tough financial times but it also, and more importantly helps you be comfortable with having money in the bank without feeling the need or desire to run out and spend it.

Having a safety net or built-up savings will help create a sense of wealth. The less money you have in savings usually causes you to have a sense of lack, not enough, causing you to then think you can’t invest, can’t save, etc.

How much should you save? One month is a great start, but 6-12 months of savings is a great step to get to and then maintain that over time.

Step two creates security

What are your finances like currently? Do you go to work due to a desire of WANTING to work or HAVING to work? Are you overwhelmed at how long you will have to work just to pay off the bills you have with no end in sight, and maybe nothing to look forward to? Does the image of how you think finances are supposed to work contradict the experience you are going through now?

By building up your savings just to a point of having 6 months of expenses, or more, you have now put yourself in a position of having a partial amount of financial freedom. Not to the point where income will pay expenses if you work or not, that comes during step 4, but you have taken back the ability to choose what you do for work at least to a degree.

For many living paychecks to paycheck, any financial problem is viewed as an absolute catastrophe. A simple tire goes flat, and it’s a tragedy. Break your phone, tragedy, drop your glasses, tragedy, on and on we can go with this. Imagine, just imagine what it would be like if nothing else you had 6-12 months of savings put away in case something happens financially.

3. Get an infinite banking policy

After building up 6-12 months of savings and then having something like 5-10k extra, the next step to take would be to put that extra money into an infinite banking policy. Earn tax-free returns, store, protect from lawsuits and creditors, and don’t have to wait until age 59 1/2. This is a great way to diversify your savings and start earning extra interest on it.

If you have a 401k, IRA, or ROTH, it would be a much better return to redirect the payments you are making to them to your own infinite banking policy. Especially if you want to start doing some passive income investing because that retirement account usually has penalties and fees that make them less profitable if not impossible to use for those purposes. Instead, an infinite banking policy will allow you to leverage the cash value you have in your policy.

This article discusses questions about whole life insurance, get more info on what an infinite banking policy can do.

4. Invest in passive income streams

There are many different options for generating passive income. Some of them only require $100 to start getting a return. So after getting your savings built up and protected, oftentimes it’s wise to start storing your savings in your infinite banking policy, though you’ll probably start with it being in a savings account and then just leave it alone.

treasurydirect.gov Ibonds (as little as $25, up to $10k per person. Also a good way to outpace inflation)

This is an example of how to leverage a whole life policy. If you are earning 4% in your infinite banking policy, take a loan ours for say 3%, which gives you a net gain of 1%, plus the gain from the investment. This is how the wealthy double-dip on the use of their money to accelerate the growth of their money.

Passive income ideas

These ideas are mentioned as a short list of examples, however, they have the benefit of being things that will generate passive income immediately. We could list other ideas like blogging but that’s something that will take lots of time to build.

The most common passive income option is used by nearly all wealthy in real estate. Within real estate, you can do single-family homes, car washes, storage units, apartments, and syndicated opportunities. Investing in real estate is great for many reasons such as tax advantages, write-offs, equity growth that can be used to buy more properties, and of course the cash flow. Many other ideas are available.

I wrote another article with 26 examples of different passive income ideas and some places to get started with it, check it out here.

Things passive income helps with or allows you to do

Pick a job you find interesting instead of slaving away purely for the wage increase

Do you have a job that you love doing? Did you pick it because of the activity that it requires on a daily basis or did you pick it mostly based on the salary that it provides? I think we have all known or been someone that chose to stay in a job they didn’t like just for the pay.

Start a business you love

Is there something you are passionate about and always wanted to make a business out of it? HAVING to work 9-5 at a job you just tolerate stops so many people from pursuing what makes them feel alive. By adding more passive income to your life you can change this scenario around and pursue a more fulfilling career. Often times when someone is focused on making money from something they eventually burn out, but when they do it for the journey itself it’s much more likely to last.

Travel

Even if you don’t want to travel the world, having a more solid financial situation due to passive income would allow you to visit friends and family, go out in the town you live in, or have nearby relatives.

Volunteer

Church, city, and many other organizations have opportunities for individuals to come in and volunteer their time helping others with one various task or another. I’ve heard some say they would like to volunteer their time but they just have too much to do because of work.

Take care of a family member without money worries

It can be very time-consuming not to mention costly to take care of someone(we all know this because at one point we were taken care of and aren’t you just a pill-haha!). For most taking care of someone is not financially viable, much less paying for a caregiver. With passive income, you can remove that as an obstacle and then enjoy the company of your family member while giving them the company of someone that truly cares for them.

Have less day-to-day stress

According to the APA(American psychological association), about 64% of adults mention being stressed regarding money. In their article “Dealing with financial stress” they talk about several steps to reduce one’s financial stress.

It deals specifically with money around the holidays but there are a few steps that are also helpful for building a passive income.

1. Track your spending

If you don’t track what you are spending it is really easy to throw money at things you don’t need. I recall years ago asking myself “How much am I spending on eating out” and after checking I realized that hundreds of dollars a month were going down the tube just because of that.

2. Identify your financial stresses and make a plan

What things in your life are the cause of your stress and how can you and your family figure out how to avoid them. Sometimes this means lowering your expenses for a time until your finances are changed, other times it just means avoiding talking about finances during the more tired times of the day. Whatever you find out personally stick to your plan and review it at least quarterly if not monthly.

3. How do you handle stress?

We all deal with stress in our own ways. Recognizing what your personal habits are is key to turning your life around. If you deal with stress by drinking or other destructive habits then that itself may be a part of your financial stress. Not having the money to make ends meet, getting stressed about it, and then going and buying more to drink won’t help you have more cash. We all find outlets for our emotions in stressful times (mental health America has an informative post on ways to manage negative emotions here).

If you haven’t heard, stress has a large impact on one’s physical and mental health. Some of the things that stress can cause are insomnia, weight gain or loss, depression, and anxiety.

Spend more time finding ways to create value for others

Daily tasks and responsibilities often keep us from looking for opportunities to provide help to others as often as we’d like. If you had passive income would you want to start up a nonprofit? Maybe, maybe not, but you would at least have more freedom to do so.

Pursue an interest and turn them into a hobby

How many topics do you find interesting but just don’t have the time to look into them much less take lessons and practice? With a steady income while you sleep situation from the passive income you can easily decide to turn a random interest into a hobby simply from the time freedom it provides.

Conclusion

Life is challenging enough as it though we seem to make it harder by living paycheck to paycheck. Creating financial freedom through passive income is possible and gives you more options to live well.

Contact us today to create a personalized illustration and see how much passive income you can generate now.