Build Passive Income – Start with the Right Mindset
Many people ask me about Passive Income. What is it? Where can they find it? But why so much interest in this topic right now? Well, people are looking for passive income opportunities right now; or they have lost their job or are looking for additional avenues of income, perhaps their business has slowed down so they are looking for additional new ways to generate income.
The term “passive income” has become more popular since Robert Kiyosaki’s “Rich Dad Poor Dad” was first published. However, this money making technique has been known to wealth builders forever.
Very often, the same people who are looking for passive income are the same people who are looking to get out of debt. Unfortunately, however, the two concepts don’t work so well together. Here’s why… The goal of getting out of debt (paying off your mortgage, paying off your car loan, etc.) is to pay off your outstanding debt by whatever means necessary. When you focus on getting out of debt, you don’t focus on making more money! This is where the two concepts collide. The main concept of passive income is to EARN MORE MONEY, whether it’s creating residual income or starting a business, for example. If you’re looking to generate passive income, don’t focus on getting out of debt…it’ll take care of itself!
Although paying off all your debts (mortgage, car, credit card) obviously has the positive effect that you can’t hurt your credit score with late payments, in fact, no credit on your credit report will actually have a negative impact. . (I recommend keeping your credit card debt below 30%) You want to have these items on your credit report, as this helps strengthen your score. People will look for these types of accounts when looking to extend or grant you lines of credit.
It’s all about getting into the right mindset. People are caught between what I like to call a consumer mentality versus a wealth builder mentality. The wealth builder mindset is all about creating passive income. The consumer mindset is about the 9 to 5 job, security, getting out of debt… all the things you think give you financial freedom, but are actually disguised as security, not real freedom. Hopefully this will give you some clarity on which side you want to move to.
Getting out of debt won’t help you get more money, since you won’t have anything to leverage to get more money or grow your business.
You also need to look at the time value of money. Paying off your house will not 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 of all, the number of people who actually do it is less than 0.01%! One of the reasons for this low rate is that you actually need to pay more out-of-pocket each month to pay off the mortgage within the 7-year period. They use fancy math to make it look like you don’t, but you’re actually paying more each month. Even with the least amount of interest to pay, you have to have extra money for it.
So you’re giving up money that’s immediately available to you, but remember, that’s the wrong mindset! You could invest that money in passive income, in your business or in 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 pay off their mortgage in 7 years!), then you’re doing it. two things:
- You are ruining your credit. You need to have at least one mortgage on your report in order to properly take advantage of credit!
- You are losing the value of money over time.
So now you’re saving 5% a year. But, the important thing to consider is that you are giving up additional income to pay off this mortgage more quickly. Instead of saving 5%, you could be earning 20%, 30%, 40%, even more than 100%. When looking at passive income, it’s not even worth thinking about one that would give you less than 10% return! For example, if you are looking to start a network marketing company, get started in real estate, etc. These things earn MUCH more than 10%! There are investments out there that earn much more – you can be trained on how and where to find these opportunities!
So you are LOSING money!
Let’s see an example… On August 1, 2009 you take out a fixed mortgage of $100,000, 30 years, 5%. 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 about $93,000 in interest over the period.
To pay this off within 7 years, you’ll need to increase your monthly payments to $1,400. This will reduce the total amount of interest you will have paid during the term to less than $19,000.
However, realistically, how many people can pay MORE THAN DOUBLE their mortgage payment? The response based on statistics of people choosing this 7 year acceleration option is less than 0.01%!
Even if you can… there are better ways to use this money… yes, you guessed it: PASSIVE INCOME OPPORTUNITIES!
For example, even taking a conservative 20% return (and trust me, in the world of passive income, 20% is VERY conservative!) on investment, let’s assume you can afford the $1,400 per month in the example above. He keeps his mortgage payments at $536.82 per month. You would then invest the $863.18 overpayment in a passive income opportunity with a 20% return.
Over a 30-year period, investing an annual total of $10,358.16 ($863.18 per month) at a 20% return…your investment is worth nearly $9 million* after the same 30-year period!
If you simply extend the calculation to 7 years…your monthly investment of $863.18 is now worth $173,750 after 7 years. This is far more than the $74,000 you would save in interest payments if you had adopted the consumer mindset.
(*includes 3.1% inflation, 15% tax rate)
As you can see in that example, you are wasting money to create that extra security. If you’re looking to make extra money, focusing on paying down debt is NOT the way to go! You have to focus on my two key principles:
- Master the ability to access capital
- Invest that money wisely
The absolute best place where you can invest your money that never goes wrong is to invest in yourself. Invest it in your passions!