I originally wrote this as a part of a commencement speech I was giving and have used it in several settings now because it applies to people at any age. I love to share this valuable concept early in the year as many plan short and long term for their futures. This is more of a big picture, long term plan, but many actions steps are needed in the short term to make the long term occur. If you want a life change, more income, less debt, more time off, flexible hours, more satisfaction, etc., read on.
This following concept relates to your profession, which takes more of your waking hours than most any item during your day, but it also applies to your overall life and satisfaction with it. Chapter 16 of my #1 Best Seller Life’s Cheat Sheets is a similar compilation of this concept with more detail.
How much money do you want to make every year?
I read an article in Entrepreneur that referred to the multiplier effect which is a portion of this concept. I suggest you seriously consider this way of thinking to turbo thrust your future potential. Think about this question then answer it honestly. How much money do you want to make every year? The best time to ask yourself this question is when you’re finishing high school or college (or even before), but ask yourself now regardless of age.
For our example let’s use a young person still in her 20’s and assume she is working another 30 years. Let’s assume she wants to earn $100,000 per year which equates to $3,000,000 (million) over her remaining work lifetime. Recall you will have taxes and your living expenses deducted from this amount so you will end up with much less to spend or invest as you wish. Ask yourself if you are happy with that amount or, alternatively, is it enough? If it’s not, then what are you going to do about it?
Passive Income with a Multiplier Effect
Assuming you are not happy with it, I suggest you look at business and investment opportunities that have a passive income (where you don’t have to be present all the time) and have a multiplier effect (repeats itself over and over and pays you income each time).
Active vs. Passive Income Clarity
Active income in its purest form is working for $10 per hour so every hour you work you get paid $10. Every hour you don’t work you don’t get paid. None of your income is tied to sales for the company. Many sales people are on a base amount of pay plus commission tied to their sales or maybe on straight commission where all of their pay is tied to making sales. If a sales person has mature accounts that doesn’t need her regular presence she is in a semi-active or semi-passive income stream. If she is required to be present, then her income is primarily active even if it is commission based and fluctuates based on sales.
I was strongly reminded of this “passive income without your presence” part years ago when I had returned to finish law school, ultimately becoming a licensed attorney. I worked with and talked with many attorneys that were working lots of hours, under pressure for more billable hours, stressed out, and unhappy with the profession. Most of them were not making anywhere near what you think attorneys earn, especially if you count all of the hours they had spent on work, which is another fallacy I learned.
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Fulltime Lawyer-Employee Example
You only have 2080 hours you are paid for each year as a 40 hour per week full time employee and only actually work ~1700 or so of those (with sick, vacation, holiday, continuing education, etc. deducted). Many firms had billable hours at 1700-2000+ which meant to meet the minimum billable hour level all of the hours you were in meetings, planning-strategy, training, non-billable research, with your supervisor, marketing, etc. were hours in excess of full time hours you had to work. This rude awakening should have been a significant part of a law course in our first semester so you could jump ship if this was not your cup of tea. I recall someone bragging that she had billed 2500 hours that year, which meant she had no other life and clearly no balance in her life, even though she was married and had two young kids in school.
Service Provider Billable Hours Income Cap
You can probably see as you bill more hours you run out of waking hours and are clearly limited in the amount of hours you can bill. Therefore, you are limited in what you can earn if you have to be present to get paid, which means your income is capped if you are a service provider billing by the hour based on your presence. This also applies to doctors, psychologists, nurses, and most other direct service providers, which is the majority of the jobs as many more manufacturing jobs are eliminated by automated equipment.
Passive Multiplier Effect Skyrockets Income
The multiplier portion relates to getting involved with something that you create, purchase, add to something, or complements something else that repeats itself continuously and the need doesn’t end so your income continues indefinitely, passively (without you there).
Here are several examples that may help you understand this concept:
• royalties (songs, books, inventions, etc.)
• franchises (be the franchisor and get paid by all franchisees or own multiple locations)
• duplicate your business in different locals with regional managers where you get income from each region
• add many associates to your firm where you get a piece of all billables
• sell/manufacture consumable products that people use up and buy again regularly
• membership sites/businesses that pay monthly
• in person courses taught by instructors you train or online courses
• license your processes or ideas that others use (get license fees)
• several real estate options
• several stock market/financial investment options
• informational products (repurpose content into several types of media)
• webinars/teleseminars that are taped then something is sold
• software plus updates/support
• phone/tablet/notebook applications
• network marketing businesses (like Arbonne or Amway), etc.
All of these allow you to duplicate an initial product/service/concept and continue to earn income year after year, multiplying your income without your presence. They can make your original answer to the question about income skyrocket, allowing you to do a lot of other things in your life that are not tied to the hours you work. This thought process can seriously affect your entire life so I would give it some real thought regardless of your current age. I’m currently reworking my plan.
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Grow Income with Multiple, Concurrent Streams
To extend this concept into multiple streams you may start with the streams that are easiest, you can afford, you have access to, or use some other logical reason, but the point is to get started today. Time works for you if you get started early because of the key variable: compounding. I’m certain you’ve seen the examples that show someone investing $100 a month in an investment when they are 20 years old vs. one that does the same starting at 30 or 40 years old. The 20 year old has a much greater amount of money in his account when he hits 60 years old than the 30 or 40 year old. It’s all because of multiple years of compounding.
Easy Way to Get Started– 401k and 403b
For an easy way to start, let’s say for example you have a typical job and have a retirement investing option. Let’s assume the company you are at doesn’t have a pension plan and you don’t have a deferred income option. If you do, those are both additional passive income streams. Many companies have a 401k (or 403b for non-profit/public entities) where employees can invest X amount each pay tax deferred, so before any taxes are deducted. This becomes a passive income stream at retirement and compounds, tax deferred for decades. If there is a Roth 401k option, I would usually choose that one.
Compound Your Streams with a Company Match
If your company matches some of your contributions as you invest or as a year-end bonus, this is a second income stream where you can take advantage of all of the free company money it will invest in your account. Many times it is dollar for dollar matched up to a %; take advantage of this bonus investment. It also compounds tax deferred until retirement. If you are in your 20’s and 30’s and depending on your risk tolerance, it is usually wise to get into equities and a smaller amount in bonds so it can grow bigger and quicker. What you invest it in is another factor related to how big of a passive income stream it will become.
Add IRA’s to the Your Streams Mix
You can then start investing in an IRA also. I heavily lean toward a Roth IRA, which is not tax deferred when you deposit funds into it, but it’s tax-FREE on the growth and when you ultimately start to withdraw funds. A traditional IRA will work also and you can deduct deposits from your taxes each year. But you are taxed on the growth and the original deposits when you withdraw and you have no idea what the tax ramifications will be when you retire or how much it will grow.
Regardless, you can have a payroll deduction into an IRA and I would do it that way to set up another passive income stream. What you invest the deposits in works just like the 401k thoughts above so you can get into equities/ETFs/mutual funds to typically get better growth than money markets/CD’s in your earlier years.
Realize I am only in the financial/investment section from the options list. Also realize you need to monitor and adjust these as changes occur. For example, if the stock market has another big correction (reduction), you may need to sell your equities and move into cash until it bottoms out, buy back in and let them ride the wave up, which will make you even a bigger income stream.
Auto Deductions for Big Ticket Items You’re Saving For
Regardless, I would get a few other deduction streams set up also, especially if you are younger and are saving for a car, house, school, etc. I would automatically deposit into those accounts each pay or whenever you get income so you feed them without getting your hands on the $. It forces you to avoid breaking your plan and spending monies meant for these accounts on lower priority items.
Start More Streams Once You have the Initial Ones Done
Once you have all of the financial streams established, look at the list of additional passive options and see which of those apply. You should continue to diversify into different streams. If network marketing applies to you, get it rolling. It you have special skills, maybe an online or in person course would be another stream. If you have a product/service to sell, work on that one. Regardless of which ones apply to you, get that next stream started. Establish that stream then as you fade out of its daily draw on your time, you can determine another stream to establish. It’s usually wise to get each stream established and running well without your direct interaction before starting another one.
Solo 401k or Uni-k For Your Own Business
One related last hint I implemented is the solo 401k or Uni-k. If you and/or your spouse has a business or a service/product you sell that you can use to form a side business, you can set up a Uni-k and invest quite a bit more tax deferred into a retirement account; thereby, saving you current day taxes. The limits are higher than typical 401k’s, but if you have a typical job where you contribute to a 401k already, you do need to recognize that and deduct that from the Uni-k amount. Regardless, it can serve as another passive stream.
The real question is whether you are going to go through this exercise, plan your next steps to put this in place and take action today to start the process? If you do, hold on to your shorts because it has the potential to positively change your life from here forward.
Recall you can succeed in completing most of your true passions through:
Consistent (regular, uniform behavior),
Persistent (to move forward stubbornly),
Perseverance (continue in spite of difficulties),
Combined with a “never give up” attitude.
Caution Will Robinson
Realize all of these investments have some level of risk and I am not giving advice as a Financial Advisor, CMA, or Attorney. You have to proceed at your own risk and get other professionals’ advice if you are uncertain. I am only sharing my opinion on what has worked for me and I have seen work for others. You ultimately have to make your own decisions on the directions you take then monitor and revise them as needed.
You can get my #1 Best Seller @ www.LifesCheatSheets.com or contact me by e-mail at [email protected] for a signed copy. I cover a lot more options and details in that launch book than I do here.
