Over the past few months the news of lay-offs across a variety of industries have certainly raised the question for many – what if I am next. At least that was the case when I witnessed two corporate restructures and saw many of my colleagues being let go. Thankfully, I approached those experiences with humility and as a learning opportunity vs. feeling safe or any more special and took steps to prepare. This turned out to be a smart decision as I was not so lucky to survive the third restructure.
For others it may be a matter of not wanting to trade more time for money, which is something I experienced too as I started climbing the corporate ladder. Something about having to work longer hours and be available 24/7 in exchange for a small raise did not add up when I calculated the $ per hour worked coupled with the higher amount of stress.
The idea of creating a passive income stream that would provide more optionality was appealing to me, and likely is to many.
But how can one determine what passive income amount is sufficient and how it can accumulate over time? In today’s snippet I provide five actionable steps one take to accomplish that.
1. Get clear on your personal financial position – amount of savings in the bank, amount of savings in retirement or brokerage accounts, monthly income, and monthly expenses. Then review your monthly expenses and determine the must have/survival expenses that cover shelter, food, gas, and utilities, and some incidentals.
Ultimately the expense number one would need covered by passive income would vary from person to person depending on your lifestyle and individual goals. For some that freedom number would be the survival expenses. For others, it may include some additional expenses for travel and eating out. For third, the freedom number might equal one’s current income.
2. Next identify various passive income streams that cover this target freedom number. In a prior snippet I discussed how investing passively can generate a meaningful passive income stream that one can ultimately retire on or apply towards other purposes important to him/her. However, passively investing in syndications is just one income stream. Other income streams may include:
- Being an affiliate (e.g. for Amazon or another product or service provider you recommend)
- Providing consulting services on the side based on your area of expertise
- Starting a franchise
- Buying and managing a single family rental, etc.
I can speak in more detail to the passive investment in multifamily income stream as this is my area of expertise and in a prior snippet I showed a rather conservative scenario of how one investment a year can multiply over a period of time.
3. Determine the amount of investable capital needed for any of these income streams. In a prior snippet I also discussed various sources of liquidity one can tap into, outside of standard savings. Another strategy I have seen couples deploy is to agree to live off the income of one spouse while using the other spouse’s income to invest.
4. Determine your freedom timeline. Depending on your freedom number and amount of investable capital and time, for some this timeline may be 3-5 years and for others longer. However, once you have a timeline in mind, you can start tracking your progress against it to ensure you are continuous moving forward, one small step at a time.
5. Execute. The most difficult part is usually taking action. Nevertheless, it is an important first step to get you started and to stay consistent over time. Set quarterly and annual personal financial meetings with yourself (or with your partner, as applicable). Life events may cause you to adjust the timelines. However, the important part is to track your progress over time, stay the course, adjust as needed, but keep moving forward. Real estate is not a get rich quick scheme. It does take time, hence the importance of getting started early.
Investing in real estate is just one vehicle one can use to achieve financial freedom and create job optionality. It was the path I chose and still remember the day when my passive income streams met and exceeded my survival expenses. Later that provided me with optionality to take on a path of serving others and being able to spend more time with loved ones. It did take time and certainly did not occur overnight or without careful planning but the upfront work paid off and it has turned out to be a rewarding journey.
Download The Busy Professional’s Quick Guide To Investing In Multifamily here.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.