The Power of Passive Income

In 2005, Robert Allen released the New York Times bestseller entitled, “Multiple Streams of Income”. Though it was not an entirely new concept, the book certainly put a spotlight on the need for investors and entrepreneurs alike to focus on the creation of multiple revenue streams. However, as I pointed out in Part 2 of this series, many small business owners found that their pursuits for additional income only led them into a trap of creating 2 or 3 full time jobs for themselves. These hardworking individuals never saw the blissful ending they so earnestly desired because they didn’t understand which type of income they should be pursuing.

There are 2 major types of income: active income & passive income. Active income is defined as income that we derive from services actually performed. Another very technical term for active income is something referred to as, well…WORK! Most people consider it a 4-letter word, and one of life’s necessary evils. While it may be considered evil by some, it’s certainly not all that necessary. That is, if you are able to implement an effective strategy to create income that’s independent of your personal involvement.

Hard work is the backbone and foundation for any new business or entrepreneurial endeavor. Most start-ups require a great deal of time, energy and patience to get them off the ground. Unless you are fortunate enough to have incredibly deep pockets, the beginning weeks and months of your start-up will certainly be a grind. God-willing, you will eventually begin to make better money, and the business will start to experience success. That’s when you will come to a major crossroads in your organization. The decision you make at this juncture is imperative, with the answer paving the way to either a life of freedom or one of hard labor.

Passive income is defined as earnings an individual derives from a rental property, limited partnership, or other enterprise in which he/she is NOT ACTIVELY INVOLVED. The biggest preventer of “going passive” with your business is known as Parkinson’s law. The more we make, the more we have a tendency to spend. If we make the mistake of consuming all our profits, it leaves nothing for business development or the hiring and LEVERAGING of other people’s time and talents, which is the key to passive income. Too many entrepreneurs stop at a good income, satisfied to make ends meet, and possibly even attain a few nice things. Most never create a strategy to take a good income and make it great (primarily by making it passive) so they can focus their “active” time on another income stream or perhaps one of life’s other passions.

The parable of the talents is a great Biblical example of passive income in action, as the master earned a 100% rate of return by simply placing the responsibility in the hands of a capable assistant or employee to manage his business and finances. That should be the goal for each and every Christian entrepreneur. Create a business in an area you love, make a short-term sacrifice to create massive income, turn the income passive and then go fulfill your divine call. Whether God’s will for you is to open more businesses, go to the mission field, volunteer at your church or work at a homeless shelter, you need to have the freedom to go and do without the pressure of finances and the day to day work of your business. That’s the freedom that passive income provides and it gives you the power to do as you feel led, not as you feel forced to do to survive.

Other Related Posts:

Multiple Streams of Income, Part 1
Multiple Streams of Income, Part 2

The Entrepreneur's Great Mistake (MSI, Pt 2)

Warren Buffett’s Rules of Money:

#1 – Never Lose Money

#2 – Never Forget Rule #1

Warren Buffett’s rules of money are incredibly simple and succinct (and of course a little comical), yet unfortunately many entrepreneurs today don’t heed the wise sage’s advice. Tens of thousands of dollars in personal income is often lost by many small business owners because of one major flaw in their business model. In part 1 of this series, I pointed out the importance of generating multiple streams of income in your business. It is essential to your financial well being that you develop numerous revenue streams, preferably diversified across different business classes. This helps to minimize risk and create a safety net for times of economic contraction or uncertainty. However, one major caveat must be included in this conversation to make sure you never violate Buffett’s #1 rule (or #2 for that matter).

Every entrepreneur starts out with good intentions, armed with an optimistic vision for the future and a fresh commitment to self-reliance. After years of working for “the man”, they are ready to experience the freedom and invigoration of this brave new frontier. In the beginning, grinding out long & arduous hours with little sleep is considered the norm. It’s seen as a necessary “short-term sacrifice” for the chance at the “long-term gain” of owning their own business, being their own boss, and achieving great prosperity.

After successfully getting the fledgling business off the ground, many entrepreneurs see the need for an additional income stream, and begin pursuing other opportunities. This requires working even longer hours in an attempt to maintain the momentum of the 1st business, while making the necessary sacrifice to see the 2nd business through the inevitable “growing pains” of start-up. Though from outward appearances it looks as if all is going according to plan, there is an ugly secret lurking around the corner, just waiting to be discovered.

At the end of another long work day, our entrepreneurs suddenly look up and realize that 5 years have gone by, and the term “short-term” sacrifice now seems like an unbelievable misnomer. Both revenue streams are providing a steady source of income, but the once optimistic visionaries have now become tired and disillusioned. Upon careful reflection and self-examination, our entrepreneurs realize that their “multiple streams of income” are nothing more than 2 full time jobs in which they have grown to hate their new boss worse than their old one.

After years of pounding out 80 hour weeks, and teetering on the edge of a nervous breakdown, our small business case studies learned a valuable lesson that I hope you can grasp long before they did. The secret to financial freedom is not just multiple streams of income, but multiple streams of passive income. More on that in part 3…

To Your Success, Matt Robinson

Multiple Streams of Income, Part 1

"The Trouble with the Rat Race is that Even if You Win, You're Still a Rat." ~Lily Tomlin

I absolutely love this quote from Lily Tomlin, because it couldn't be more true. How many people do you know that have spent their lives climbing the corporate ladder, only to find out it's leaning up against the wrong wall, one that really doesn't satisfy their inner desires and personal passions?

Who do we consider the "winners" of the rat race? Doctors, lawyers, and maybe a handful of other professions come to mind. But when you really take a close look at their lives, the 9 to 5....erhhh, more like 9 to 9 grind that they go through every day, is it really all that glamorous? They're really just a more successful version of a wage slave, with a little bit nicer car.

As creative small business people and savvy entrepreneurs, we need to commit to creating multiple streams of income in our lives. In today's tough economic times, it's very risky to have all of your proverbial "eggs" in one basket, relying on just one revenue stream. Creating multiple sources of income helps create a safety net, especially when they are diversified across different types of products or services.

One example of this would be to have an investment in small grocery store or farmers market, while at the same being heavily active in real estate or the stock market. While the latter may suffer in the midst of a recession, the former is considered a "staple" and is less likely to be affected by the rise and fall of financial markets. By implementing business strategies that produce multiple revenue streams, you can rely on one source of income if another one is diminished for a period of time due to unforeseen circumstances.

After you have developed numerous income streams, it's time to turn your focus towards making those streams as passive as possible. You should examine every aspect of your business and find out which tasks or activities can be delegated and/or outsourced. The more time you are able to free up in your day, the more time you have for creating additional revenue streams. The goals is to eventually have all of your income streams completely passive, so that your money comes in whether you're at work or on some island in the Caribbean. That's when you have officially graduated out of the rate race and are back in the game of truly enjoying life.

For a great way to visualize yourself getting out of the dreaded rate race, play the game Cash Flow 101 by Robert Kiyosaki. He also makes a great kid's version to start your children off early thinking the right way about money. I would also highly recommend Timothy Ferris' book entitled, "The 4-Hour Work Week". It's the entrepreneur's outsourcing handbook, and an absolute must read for small business owners.

**Make sure you come back for part 2 of this series, as I will be examining Warren Buffet's money rules, as well as the resurgence of the Entrepreneur. To your success!**