Monday, March 08, 2021 / 12:10PM / Grace Agada / Header Image Credit: Forbes
One of the greatest things you can do in life is to transfer your source of livelihood from active to passive income. Active income is any income that requires ongoing work to thrive. And Passive income is income that can thrive without work. These two sources of income are the two main ways people earn money in the world. However, active income is stronger than passive income because all wealth is created through active income, while passive income is safer than active income because all wealth is preserved through passive income.
Nevertheless, not all passive income is created the same and neither can all thrive in an economy. To clarify, there are two kinds of Passive income. The first is the economy impacted passive income and the second is the economy protected passive income. Economy impacted passive income is passive income that goes up and down with the economy. This type of passive income requires ongoing maintenance and investments to thrive. And this is the worse type of passive income to depend on. If you want financial peace of mind you must depend on the second type of passive income. The second type of passive income is the economy protected passive income. This is passive income that can thrive in any economy. They are safe, stable, and predictable and can relieve you of the pressure to keep working for money. The economy protected passive income is thus the only type of passive income you should fully depend on. When you reach the stage in your life where you have this kind of passive income. You are said to have achieved total financial freedom.
only a few people know how to get to this point or even create this kind of
passive income that sets them free. Most people are just investing and hoping
that they will build solid passive income someday. Yet hope is not a good
investment strategy and these people never really achieve their goal. I know
this because research shows that Out of 100 people that invest only 1 person
will become wealthy. 4 will become financially free. 15 will have some savings
put aside. And a whopping 80 people will be dependent on other people, on
pension, or flat out broke in retirement. The one big question to ask yourself
is where will you be at the end of your career and how do you propel your life
from an active income to a passive income?
The answer is simple, and it is threefold.
The first thing you need to do is know your Passive income profile. Second, you need to know how to move your life from active to Passive income. And third you need to know the passive income time wasters.
The Five Stages to a Solid Passive Income
The First Stage - The Regular Income Earner Stage
All passive income is created from active income. Thus, you need active income to create passive income. The more active income you have the more passive income you can create. That is Big Active income equals Big Passive income, while small active income equals small passive income and so on. This means that a solid passive income is created by first focusing on building a strong active income. Spending time on investing when you should be spending time on increasing your active income is the key to delaying your financial freedom. Your investments passive income will only kick in when you have large amounts of active income.
The Second Stage - The Saver Stage.
Saver stage is the stage where you save a big part of your income consistently
each month without fail. Saving is critical for investing and is the seed for
building solid passive income. According to W Clement Stone, if you cannot
save, the seed of greatness is not in you.
Thankfully everyone can save but most people choose not to save. They chose to sacrifice savings for other items in their lives. And call it a savings problem. No one has a savings problem. People have priority problems. And if you must build a solid passive income you must make passive income investing a priority for you.
The Third Stage - The Income Loss Emergency Protection Stage
Protecting yourself from the possibility of a sudden income loss is one of the things you must do if you want to build solid passive income. Thus, Emergency protection that secures your income for 12-24months is ideal to always maintain financial stability. Without this kind of emergency protection, there will be investment disruptions. Financial distractions and in most cases a complete abortion of your passive income journey. Emergency protection is thus critical if you must build solid passive income. When you achieve emergency protection the next step
For you is building a solid cash reserve.
The Fourth Stage - The Cash Reserve Builder Stage.
cash reserve builder stage is the stage where you build extra cash reserves
beyond your emergency finds that is dedicated for investing. And free from
financial distractions. Having this kind of cash reserves is important as it
helps you engage in short term and long-term passive income investing without
stress. You can put away money for a long period of time if it offers the right
benefits. And still move on with your life. A typical cash reserves for
building solid passive income should be at least N1.8million-N4.5million per year.
This amount can be bigger or smaller depending on the passive income goal you want
to achieve. The Cash Reserve builder stage is thus what truly qualifies you as
ready to build a solid passive income.
The Fifth Stage - The Passive Income Investing Phase
The passive income investing phase is the phase where investing takes place. This is the phase where you build the asset base that funds your solid passive income. It comprises setting clear passive income goals. Choosing the right asset base. And setting up your passive income investment vehicle. There are two stages involved in the passive income investing process. The first stage is the investing stage. This is where you fund the asset base that produces your passive income. And the second phase is the Cash-flow phase. This is where you earn passive income from your asset base. Thus, building a solid passive income require years of investing
before Years of earning.
Wherever you are in your investing journey you can begin to take the steps that leads to a solid passive income. The key is to recognize where you are and take the next step that moves you forward.
Previous Articles by Grace Agada
2. Three Skills to Cultivate to attain Financial Independence