Many people ask me about Passive Income. What is it? Where can they find it? But why all the interest in this topic at the moment? Well, people are looking for passive income opportunities right now; either they’ve lost their job, or are looking for additional avenues of income, perhaps their business has slowed, so they are looking for additional new ways to bring in revenues.
The term ‘passive income’ has become more popular since Robert Kiyosaki’s “Rich Dad, Poor Dad” was first published. However, this technique to make money has been known by wealth builders forever!
Quite often, the same people looking for passive income are the same people looking to get out of debt. However, unfortunately the two concepts don’t work so well together. Here’s why… The focus of getting out of debt (paying off mortgage, paying off your auto loan etc) is to clear your outstanding debt by whatever means necessary. When you focus on getting out of debt, you are not focused on making more money! This is where the two concepts clash. The primary concept of passive income is to MAKE MORE MONEY, either through creating residual income or starting a business for example. If you’re looking to create passive income, do not focus on getting out of debt… that will take care of itself!
Although paying off all your debt (mortgage, car, credit card) obviously has the positive effect that you can’t then hurt your credit score with missed repayments, in actual fact, the lack of any credit on your credit report will actually have a negative impact. (I do recommend keeping your credit card debt under 30%) You want to have these items on your credit report as this helps strengthen your score. People will look for these types of account when looking to extend or grant you credit lines.
It is all about getting into the right mindset. People are stuck in-between what I like to call a consumer mindset versus a wealth builder mindset. The wealth builder mindset is about creating passive income. The consumer mindset is about the 9-5 job, security, getting out of debt… all the things that you think give you financial freedom, but are just really disguised as security, not real freedom. Hopefully this will give you some clarity over which side you want to move to.
Getting out of debt will not help you get more money, as you won’t have anything to leverage in order to get more money or grow your business.
You also need to look at the time value of money. Paying down your house is not going to help you create passive income. You may have seen some of the mortgage accelerator products on the market, which promise to show you how to pay off your 30 year mortgage in 7 years. First off, the number of people that actually do that is less than 0.01%! One of the reasons for this low rate is that you actually need to pay more each month out of your pocket to get the mortgage paid off within the 7 year period. They use fancy math to make it seem as though you don’t, but in actual fact you are paying more each month. Even with the lesser amount of interest to be paid, you’ve got to have extra money going towards it.
So, you’re giving up money that you have immediately available, but remember, that’s the wrong mindset to have! You could put that money towards passive income, your business, or growing your passion. Focusing on getting out of debt keeps you poor longer!
So, you have a 30 year fixed rate mortgage. If you pay this off using one of the 7 year accelerator plans (and remember, less than 0.01% of people who buy these accelerator plans actually follow through and achieve paying off your mortgage in 7 years!!!), then you’re doing two things:
- You’re messing up your credit. You need to have at least one mortgage on your report in order to be able to properly leverage credit!
- You’re losing the time value of money.
So now you’re saving 5% a year. But, the important thing to consider is that you’re giving up extra income in order to pay down this mortgage more quickly. Instead of saving 5% you could be making 20%, 30% 40%, even 100+%. When looking at passive income, it’s not even worth your time to think about one that would give less than a 10% return! For example, if you’re looking at starting a network marketing company, starting in real estate etc… these things earn a LOT more than 10%! There are investments out there that earn a lot more – you can be trained on how and where to find these opportunities!
So you’re LOSING money!
Let’s look at an example… On 1st August 2009 you take out a $100,000, 30 year, 5% fixed mortgage. Interest payments will be $536.82 per month. Pay just this amount and you’ll have your mortgage paid off 30 years later after paying approx $93,000 in interest over the period.
In order to pay this off within 7 years, you will need to increase your monthly payments to $1,400. This will reduce the total amount of interest you will have paid over the term to just below $19,000.
Realistically though, how many people can afford to MORE THAN DOUBLE their mortgage payment? The answer based on statistics of people choosing this 7 year accelerator option is less than 0.01%!
Even if you can… there are better ways to use this money… yes, you’ve guessed it: PASSIVE INCOME OPPORTUNITIES!
For example, even taking a conservative return of 20% (and believe me, in the passive income world, 20% is VERY conservative!) on the investment, let’s assume you are able to afford the $1,400 per month in the example above. You keep your mortgage payments at $536.82 per month. You would then invest the excess payment of $863.18 into a passive income opportunity at a return of 20%.
Over a period of 30 years, investing an annual total of $10,358.16 ($863.18 per month) at a 20% return… your investment is worth just shy of $9 million* after the same 30 year period!
If you just extend the calculation to 7 years… your monthly investment of $863.18 is now worth $173,750 after 7 years. This far outweighs the $74,000 you would saved in interest payments if you’d have adopted the consumer mindset.
(*includes 3.1% inflation, 15% tax rate)
As you can see by that example, you’re losing money to create that extra security. If you’re looking to create extra money, focusing on paying off debt is NOT the way to do it! You need to put your focus on my two key principles:
- Master the skill of accessing capital
- Investing that money wisely
The absolute best place that you can invest your money that never goes wrong is to invest into yourself. Invest it into your passions!