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The Power of “Passive Income” Thumbnail

The Power of “Passive Income”

The definition of passive income is revenue that is generated in a way that doesn’t involve significant or ongoing labor, energy, or time to earn or maintain. In other words, it’s basically what’s referred to as “making money while you sleep”.

With very few exceptions, most passive income still requires some work. It can be relatively hands-off (say with money from an inheritance) or require a burst of upfront effort before passive income is generated. 

Developing passive revenue streams is important for several reasons. For instance, it’s a great way to establish financial security for yourself or for a business. Passive income is also important to grow and scale a business. Having a steady trickle of passive revenue coming in to cover costs, can allow time and energy to be actively directed toward efforts that add value to and grow a business, like creating content and developing additional features in response to member feedback.

There are three main ways to generate passive income: buying real estate, starting a business that involves limited effort, or investing in the market. Rental real estate is almost always the consideration or what most people believe is the way you create passive income. As with any “opportunity”, you should always weigh the PROS and CONS before embarking on a decision. 

When it comes to real estate, I have found what attracts people to this form of passive income is the same thing that ultimately leads to an urgent exit strategy- the management. In a perfect world, rental income can be extremely powerful, but we do not live in a perfect world. Furthermore, (when it comes to real estate) the world is rarely, if ever, perfect. Lack of liquidity (access to money), rising taxes and insurance premiums, neighborhood decline, unfavorable tax code changes, landlord role/management, and difficult tenants are just a few of the cons to real estate that are both out of your control and unpredictable. 

Starting a business of all the options to establish income involves the most management and work making it the least passive option. The evolution of technology has provided a unique environment that allows for businesses to be much more passive than in the past. An online-based business, sales, and/or the ability to virtually outsource the work of traditional employees have created a much easier way to build a passive business. When it comes to starting a business, it is important to understand that nine out of ten businesses fail in the “startup phase”. This makes the loss of any capital infused to create that business and the business itself extremely high. 

Traditional investments are another form of passive income. However, most people never looked at this as an option. Traditional investments compared to all other passive income options demand the least amount of involvement. If done correctly, they involve the least number of aspects outside of your direct control. In turn, they involve the least amount of long-term risk. If you were to invest 1.5 million of your capital into a MODERATE diversified investment model (50% stock and 50% bonds/fixed income assets) your long-term annual average return would be somewhere around 6%. That rate of return would provide an average of $90,000 in interest annually. Traditional investments, also give you the unique ability to decide how you want those investments to be taxed depending on the structure and the buying and selling of the investments within the model.

Passive income can be an incredibly powerful tool within anyone’s financial plan. Weighing the pros and cons before making any decision is important. When it comes to developing passive income, it is important to identify what option is best for you according to your individual goals and objectives. Passive income is often discussed and, in turn, “sold” to us by the “rich and famous.”  Whether it is “come to my seminar” guy or “buy my program and become a millionaire for the low low cost of (insert unreasonable price here….)” infomercial, be mindful and diligent when it comes to the pitfalls that often are left out of the presentation.                              

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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Written by Ronnie Thompson

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