People invest money to generate passive income that can equal or hopefully surpass earned income. Let me explain.
First, if you work at a job or run a business (you’re an entrepreneur), you have Earned income.
Passive income is made whether you work or not. You probably hear the saying that it’s money that you make while you sleep. This means that passive income increases your net worth, or wealth, whether you work or not.
At first, most of us don’t have enough passive income to replace our earned income without some severe cutbacks on our lifestyle. Ideally, passive income should be nearly twice the level of active income because of market downturns and inflation.
I stack my passive income, and by this I mean I continually invest in my passive income and use that income stream to go on vacations and other personal goals. Underneath the fun activities (aka vacations), I have layers of expenses that can be substituted for the vacation in tight times. I’m sure we all do this.
I like both dividend stocks and growth stocks for passive income. Dividends are the simplest form, you get a check from the stock you own. Growth stocks are not as predictable but could have a higher upside, think Amazon, or lately Nvidia, but for those you need to sell the gains on the stocks. Growth stocks are a trick, because I owned both Tesla and NetFlix, but sold for the capital gain way too early. My loss… That is why a good dividend stock or dividend ETF is simpler.
Because I had to build up a passive income from practically zero (long story), I tend to mostly invest in S&P 500 ETFs (like Vanguard’s VOO, SPDR’s SPLG, etc.) and some select dividend stocks and ETFs.
There are plenty of books out there to motivate you to follow the investing path, books like “The Millionaire Next Door”, half the battle with investing is believing.
“The Millionaire Next Door” is great, but some of the financial statistics are a bit dated since the book is over 20 years old. So while the core principles are solid, the details have changed with time. For example, recently I read 88% of millionaires are college graduates, while that percentage was much lower in TMND.
For a strategy, I loosely follow this personal finance pyramid.
The goal of long-term investing is to increase your wealth for your family, security, comfort, and adventure.
Thanks for reading,
Unk
AI’s improvement on the above:
Passive Income and Its Importance:
- Earned Income: When you work at a job or run a business, you earn active income. This income is directly tied to your effort and time.
- Passive Income: Unlike earned income, passive income is generated whether you work or not. It’s like money that flows in while you sleep. This type of income contributes to your net worth or wealth, regardless of your active involvement.
Building Passive Income:
- Initially, most of us lack sufficient passive income to fully replace our earned income without making significant lifestyle adjustments. Ideally, your passive income should be nearly twice the level of active income. This buffer accounts for market downturns and inflation.
- Stacking Passive Income: I follow a strategy where I continually invest in my passive income sources. I use this income stream for various personal goals, including vacations. Beneath the enjoyable activities (like vacations), I maintain layers of expenses that can be substituted during tight financial times.
Types of Passive Income Investments:
- Dividend Stocks: These are straightforward—you receive regular dividend payments from the stocks you own. They provide a consistent income stream.
- Growth Stocks: These stocks may not be as predictable, but they offer higher upside potential. Think of companies like Amazon or Nvidia. However, with growth stocks, you’ll need to sell the gains to realize the income.
- Personal Experience: I’ve owned the stocks Tesla and Netflix, but I regret selling them too early for small capital gains. This highlights the challenge of timing with growth stocks.
- S&P 500 ETFs: Investing in exchange-traded funds (ETFs) that track the S&P 500 index (such as Vanguard’s VOO or SPDR’s SPLG) is a reliable way to build passive income.
- Select Dividend Stocks and ETFs: Diversify your portfolio by including specific dividend-paying stocks and ETFs.
Motivation and Belief:
- Numerous books motivate individuals to embark on an investing journey. One such book is “The Millionaire Next Door.”
- While “The Millionaire Next Door” is excellent, keep in mind that some of the data may be dated, as the book is over 20 years old. Belief in your investment strategy is half the battle.
Remember, building passive income takes time and consistent effort, but it’s a rewarding path toward financial independence.
