Building Wealth With Passive Income and Investing – The Essential Guide to a Richer Life

Becoming financially independent is a dream many of us share. If it was easy, everyone would be financially independent. Achieving financial independence doesn’t happen overnight, or without a plan. In this post, I will share with you my guide to getting into the wealth building mindset, the power of generating a passive income stream, and using your passive income to build wealth.

The Wealth Building Mindset

Having the right mindset might be the most important part of becoming successful. I break the entrepreneurial mindset down to 3 core tenets.

No Complaining, No Excuses

Let’s be honest, no one likes a complainer. It is easy to complain about your circumstances in life, how someone has it so much better than you, how life is unfair, how you’re unlucky, and on and on….

What isn’t easy is taking ownership of your life, creating a plan to improve it, and executing on your plan.

Take a moment and create a list of things in your life that you would like to change, goals you would like to achieve, and the future you envision for yourself and your family.

Once you have these written down, you can break these goals down into actionable steps.

If your goal is to pay off debt, take an action to build a budget, come up with ideas to generate more income, and contact your lenders to negotiate the loan terms or consolidate your debt.

Just writing these things down and keeping it where you will see it everyday can be the motivational boost you need to wake up for the morning jog or finishing that latest blog post before bed.

The hardest part is staying true to your plan. Life happens, circumstances change, but sticking to your plan and achieving small daily goals can result in big changes over time.

Positive Attitude and Work Ethic

There is a Mark Cuban quote that has stuck with me over the years, “Work like there is someone working 24 hours a day to take it all away from you.”

You have direct control over your work ethic. You are in control of your effort and attitude.

Whether striving to climb the corporate ladder, starting a new business, or working a 9-5 along with a side-hustle at night, by combining a positive attitude with a strong work ethic, good things will happen.

Endless Pursuit of Knowledge

In my whole life, I have known no wise people who didn’t read all the time — none, zero.” – Charlie Munger.

The moment you stop learning is the moment you stop progressing. The most successful people I know read several books each month.

The hardest working people I know are always furthering their education by taking online courses, or attending workshops and meet-ups to continue to improve themselves.

Many people think once you finish college, you’ve completed your education. While a formal education is valuable and important, what you do afterwards is equally or more important.

Whether it is continuing career development, learning to code, learning how to invest your money, or personal development, your pursuit of knowledge should never end.

The Truth About “Passive” Income

I’m sure you’ve heard the phrase “passive income.” Here’s how it’s usually portrayed: you create a blog, put up some affiliate links, and you start generating income.

Unfortunately, it isn’t that easy.

The misconception of passive income is the term itself– it isn’t necessarily “passive”.

It takes a lot of hard work, effort, and time to create a passive income stream.
The power of passive income is in the concept of your return on time.

Return on time = lifetime earnings / time invested.

For example, let’s say you’ve created a kick-ass piece of content for your new blog which took 20 hours to research and create. Your blog contains affiliate links to quality products and services that generate revenue.

In a few months the content starts generating your new blog a couple hundred visitors a day, and you make $200 in affiliate commissions. You’ve effectively made $10 an hour!

Not a bad start for a new blog, but you’re not exactly ready to put in your two weeks notice and quit your job to become a full-time content creator; however, you continue on creating even more great content and growing your audience.

Now you’ve reached the end of your first year, and you’ve generated $1,000 from your original piece of content. So for those original 20 hours, you’ve now earned $50 an hour.

Eventually, your blog gets noticed by some major publications and gets featured in a couple news articles. Your traffic spikes to new highs and all of a sudden you’ve made $10,000 from that original piece of content. Now you’ve earned $500 an hour on that 20 hours of work.

Now we’re talking!

By investing time to create quality content that provides value to your audience, that piece of content can continue to generate you income for years to come.

When you have dozens of great articles or blog posts generating you income, that’s when you can start making some serious money and truly have a “passive” income stream.

While I used a simple time calculation that leaves out the time required to market your website and grow your audience, it demonstrates the power of taking the time upfront to create great content and then generating a large return over time.

If you are looking for some ways to generate passive income, check out my article on generating income from home.

The Power of Passive Income, Investing, and Compound Interest

When you take the revenue from your passive income stream, invest it in appreciating assets, and then reinvest your investment profits, what you have is a powerful wealth generating system.

Lets take the $10,000 of income we generated in the first example, and begin investing this money in the stock market.

We are new to stock investing so we decide to stick to an S&P 500 index fund. For this example, we will say this index fund has historically returned 10% a year.

Fast forward a year later, our passive income stream grew to $15,000 this year. In addition to the growth in income, our investment returned 10% on our $10,000 investment and is now worth $11,000.

This gives us a total of $26,000 in assets. We are going to invest that $15,000 in income into the same index fund. So all $26,000 is invested into the S&P 500 index fund.

Fast forward another year, you continued to grow your income stream to $20,000. Your $26,000 investment made another 10% and you now have $28,600.

Now your total assets come to $48,600. You can begin to see how quickly this can begin to compound.

From here, lets say that you continue to grow your income by 20% annually and you continue to generate a 10% annual return on your investments in 3 more years you would have $148,566 in assets.

Invest Like a Business Owner, not a Stock Trader

One of the biggest challenges investors face is controlling their emotions, especially fear. When the stock market has dropped 10% in two months and you’ve watched the value of your portfolio plummet, it can be hard to stomach. Although your emotions will be telling you to sell, you should never make investment decisions on your emotions.

So how do you control your emotions when it comes to investing?

You shouldn’t be investing money you need.

Building up at least 6 months worth of living expenses in cash savings can eliminate the need to sell your investments to generate emergency cash. Ideally, you’d want more than 6 months, but that’s a good place to start.

When prices of assets have dropped, you’ve only lost money if you sell at those prices.

When you are managing investments you have to think like a business owner. Are you going to panic and sell the business you’ve worked so hard to build for less than it is worth?

Or, are you going to hold onto the business because you know it is a well-run operation that will be worth a lot more in the future?

When you purchase an investment, an individual stock for example, you should treat it like purchasing a business, because essentially you are.

You wouldn’t buy a business you were going to run without understanding its products, financial situation, competitors, and the skill of its managers. So you should be doing the same for a stock you are purchasing.

When prices have dropped, assets are on sale.

You’ve probably heard the saying, “buy low, sell high.” Sounds simple enough right? Too many investors do the exact opposite, they start buying after a stock has had a huge run up, and sell after the stock has dropped significantly.

During the global financial crises in 2008 – 2009 the S&P 500 dropped from over 1550 down to a low of 683, nearly a 56% decline. Everyone was panicking and people were saying that is was the end of capitalism as we know it.

Some of the best companies in the world were selling for pennies on the dollar. Wells Fargo was selling as low as $7.80 a share. As of the writing of this article, the share price of Wells Fargo is $55.66.

If you bought Wells Fargo at $7.80 you would have achieved a return of just over 613% in 8 years, not including dividends.

Wells Fargo Stock Price
Wells Fargo Stock Price Chart

The S&P 500 also recovered from its low of 683 to reach 2362 at the time of this writing, over 245% return in 8 years.

Of course, it is easy to say that in hind-sight. However, it goes to show that when asset prices decline, you should think of it as an opportunity to buy, not an indicator to sell.  As the iconic Warren Buffet quote goes, “Be fearful when others are greedy and greedy when others are fearful.”

Conclusion

Getting in the wealth building mindset and creating a plan is the first step on your journey to financial independence. By taking ownership of your life, working hard, and continuing to improve yourself everyday you are taking the first step to financial freedom.

Developing a passive income stream isn’t easy, but if you are persistent and keep working at it, you can use the income to invest and harness the power of compound interest to create long-term wealth.

Once you begin investing, treat your investments like a business you own. Do your due diligence, hold it for the long-term, and make decisions based on logic, not emotion.

Following the ideas outlined here will put you on the path towards financial freedom.

What are your strategies to achieving financial freedom?  Do you have passive income ideas?  Share them in the comments section!

 

 

 

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