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Generate Passive Income – It Starts With the Right Mindset
A lot of people ask me about passive income. What is that? Where can they find it? But why all this interest in this subject at the moment? Well, people are looking for passive income opportunities right now; either they have lost their job or they are looking for additional sources of income, maybe their business has slowed down, so they are looking for 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 technique for making money has always been known to wealth builders!
Very often, the same people looking for passive income are the same people looking to get out of debt. However, unfortunately, the two concepts do not 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 clear your debt by any means necessary. When you focus on getting out of debt, you’re not focusing on making more money! This is where the two concepts collide. The main concept of passive income is to MAKE MORE MONEY, either by creating residual income or by starting a business for example. If you’re looking to create passive income, don’t focus on deleveraging…it will happen on its own!
Although paying off all your debts (mortgage, car, credit card) obviously has the positive effect that you cannot then hurt your credit score with missed repayments, in reality the absence of any 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 because it helps boost your score. People will look for these types of accounts when looking to extend or extend lines of credit to you.
It’s about getting into the right frame of mind. People are stuck between what I like to call a consumer mindset and a wealth creator mindset. The mindset of the wealth builder is to create passive income. The consumer mindset is about 9-5 work, security, paying off debt… all the things that you think give you financial freedom, but are just 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 because you won’t have to leverage anything to get more money or grow your business.
You also need to consider the time value of money. Paying down 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 actually doing it is less than 0.01%! One of the reasons for this low rate is that you actually have to pay more each month out of pocket to get the mortgage paid off within the 7 year period. They use fancy math to make it look like it’s not, but in reality, you’re paying more each month. Even with the lesser amount of interest to pay, you must have extra money for it.
So you’re giving up the money you have immediately available, but remember, that’s the wrong mindset to have! You can invest this money in passive income, your business or develop your passion. Focusing on deleveraging keeps you poor longer!
So you have a 30-year fixed rate mortgage. If you pay that off using one of the 7-year acceleration plans (and remember, less than 0.01% of people who buy these acceleration plans actually follow through and manage to pay off your mortgage in 7 years! !!), then you do two things:
- You are wasting your credit. You need to have at least one mortgage on your report in order to take credit properly!
- You lose the time value of money.
So now you save 5% per year. But, the important thing to consider is that you are giving up extra income in order to pay off that mortgage faster. Instead of saving 5%, you could earn 20%, 30%, 40%, even 100% or more. When looking at passive income, it’s not even worth thinking about one that would yield less than 10% return! For example, if you plan to start a network marketing business, start in real estate, etc., those things pay MUCH more than 10%! There are investments that pay much more – you can be educated on how and where to find these opportunities!
Then you LOSE money!
Let’s take 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 that amount and your mortgage will be paid off 30 years later after paying about $93,000 in interest over the period.
In order to pay that 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 during the term to just under $19,000.
In reality, how many people can afford to MORE than double their mortgage payment? The answer based on the statistics of people choosing this 7-year acceleration option is less than 0.01%!
Even if you can…there are better ways to use that money…yes, you guessed it: PASSIVE INCOME OPPORTUNITIES!
For example, even taking a conservative 20% return (and trust 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 maintain your mortgage payments at $536.82 per month. You would then invest the excess payment of $863.18 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 just under $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 exceeds the $74,000 you would have saved in interest payments if you had adopted the consumer mindset.
(*includes 3.1% inflation, 15% tax rate)
As you can see in this example, you are losing money to create this extra security. If you are looking to create extra money, focusing on paying off your debts is NOT the answer! You need to focus on my two key principles:
- Mastering the Access to Capital Competency
- Invest that money wisely
The absolute best place you can invest your money that is never wrong is to invest in yourself. Invest it in your passions!
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