Passive Income Know Your Options – Snowball Effect

If you are striving for Financial Independence like myself, you are always thinking of ways to cut expenses and create a passive income stream.   I am just like you, right now I am cutting expenses while I am on my Ragnar Lothbrok plan of attacking my personal debt. While I am attacking debt with the crazy aggression and tactics of a warrior put against the enemy, I am also working on creating passive income. In a perfect scenario the goal is to be debt free and take any extra income you earn and create passive income with your investment of choice. I’m not perfect and I’m guessing you are not either.  Most who read my blog have a mortgage, student loan, car loan, or credit card balance to name a few.  If you are reading this you have started the journey to Financial Freedom, you are cutting expenses, paying off big 96oz steak size debt, and working your way to create passive income.  Let’s talk about Passive Income baby, let’s talk about you and me, let’s talk about all the good things and the bad things that may be let’s talk about Passive Income(Name that song, Twitter shout out for the winner) and now let’s get to know the most common paths to financial independence.

  1. Stock Market Investment Capitalization aka Save and Grow. This sounds more difficult than it actually is, simply said this is you saving money and putting the proceeds into the stock market to watch it grow and grow and grow. Let’s put together an example and because I like it simple(KISS aka Keep it Simple Steven) we will be using 50K as our average annual salary our take home pay after taxes and insurance and such.  If you are saving 50% of your income(Great Job, You are a Rockstar) you are saving 25K and putting this towards your Financial Independent Snowball, which is piling higher and higher as you keep adding 50% of your savings each year to make your investments grow and grow and grow into a massive avalanche sized snowball.  If you are on this path and assume a 5% rate of return you are able to retire in 17 years.  Here is one of the classic posts by Mr. Money Mustache that explains the ins and outs of this a little more.   You are saving 50% of your income, the next step to is to find what investment vehicle(401K, IRA, Taxable) you would like to choose based on how you want your investment to be taxed today and in the future, very important. That decision is more technical in nature and depends on your own situation; the Mad Fientist has been my go to for the technical side of things. The most important piece of this puzzle is the end when your investments are increasing at a rate that is equal or greater than your expenses. In this scenario you will have about 25K-30K in return each year coming in to cover your expenses and still have somewhere between $600,000-$700,000 in total investments, this talk gets into the 4% withdrawal rate, which I will not discuss remember I’m not the technical guy in this situation. Long winded answer is save a bunch of money 50% or more, put it in the stock market, and watch it grow, assuming our 5% rate of return you will be riding your Magical FI Snowball all the way to the Passive Income bank.
  2. Dividend Investment Return. This is a combination of our above stock market investment capitalization and receiving a dividend from your stock purchase. In this scenario we are still are still using our large savings rate of 50% to invest our money into the stock market, but here we do not care about the 5% investment return(we care, but it’s more of a bonus), instead we are banking on receiving a dividend for each individual share of stock. When your dividend income is greater than your expenses you are considered financially independent.  Alright example time!   I will use Even Steven’s Dividend Diva Corp(the company is made up, shocking I know), every quarter decides to pay it’s investor’s $.25 per share, if you own 1 share of stock you will then receive $1 annually just for owning Even Steven’s Dividend Diva Corp. The idea behind the dividend investor is that they care less about the overall stock market return of 5% mentioned from above and more about a continuing solid dividend investment history and return. The end goal of dividend investors is to live off the income from the dividends  once this amount is greater than your expenses you will be cashing dividend checks like Grandma thinks your birthday is every month and continues to send that $5 check, thanks Grandma you are the best!   Very similar to above you are creating your Financial Independent Snowball, first you have $1 in dividends, but as you purchase more shares your dividends increase and in many cases the dividend payout increases as well, CHA-CHING(that’s a cash register sound if you are under the age of 25).  I’m very intrigued by using this as one of my passive income streams, plus who doesn’t love getting checks deposited to your account each month?  Crazy people that’s who.
  3. Real Estate Investment Income. This passive income approach has more variables in it but contains one passive income path that I am more familiar with. I am going to stick with the most conservative approach of real estate investing  and one we have chosen, owner occupied investment real estate. The strategy behind the rental income is to have a tenant pay for your mortgage over the life of the loan. Assuming you have a 100K property at a 6% interest rate and you are receiving $600 in monthly rental income which is equal to your mortgage payment of $600.  So you are going to be breaking even,I will also assume that the rent you receive covers everything just to make this calculation simple. If you do not pay any extra on this 30 year fixed loan you will pay this off in the normal 30 year length of the loan. We are striving for financial independence, not 30 years of mortgage payments, I present to you the Super Baller Financial Independence Snowball. We are taking the $600 from rental income and then Super Baller Snowballing our expected mortgage payment from our own salary, $600 Renter, $600 from Even Steven. While it seemed like we were previously breaking even with our $600 income from the renters, we made the Super Baller decision of doubling up our payments!  In this scenario the snowball has 2 affects: 1) It allows us to pay off the home in 9 years and 1 month(I didn’t even mention rent increases every year, take that inflation) 2) It has the Double Effect. What does that mean exactly? Well your expenses were (-$600) at the beginning, but by paying off your rental property,  you are now at a positive +$600 in 9 years, that’s a change of $1,200(not including rental increases). This is exactly why real estate in my mind is my favorite investment for FI and creating wealth. Yes there are taxes involved, but I’m going to leave that up to a tax professional, but for the most part owning a home especially since it is owner occupied is going to save you money in taxes.

 

There you have it make sure you know your options to create passive income and keep rolling that snowball until he becomes a Super Baller FI Snowball!

Do you think these are the 3 most common paths to FI? What is your FI Snowball of Choice? What would be #4 on your list?  Anybody have any thoughts on Bonds vs Dividend investing?

27 Responses to “Passive Income Know Your Options – Snowball Effect

  • First of all, that song was too easy. Salt-N-Peppa in ‘da house! Song name: Let’s talk about sex. Just to avoid any confusion.

    Second, there are other ways of passive income, but in my opinion these are the best three. I’m currently invested in the first two, but I’m also saving up to start doing #3 in the not so distant future.
    Aldo @ Million Dollar Ninja recently posted…The Surprise Cost of a Visit to the DoctorMy Profile

    • EvenStevenMoney
      3 years ago

      Shout out via Twitter sent, congrats on the victory!!! I think that’s great to have multiple streams of income. We currently have all 3, but our plan is going to be directed at real estate income, but I could see that diversifying in the near future.

  • Drats, Aldo beat me to it! I wanted that shout out so bad, I made my own! 😉
    debt debs recently posted…Travel Cheap: Went to Paris, Skipped The LouvreMy Profile

    • EvenStevenMoney
      3 years ago

      Debt Debs your shout out was fabulous, I loved it.

  • Steven,

    Thanks for the mention!

    Sounds like you have a good handle on building up your passive income snowball over there. Good luck paying off that debt and then finding the right mix of passive income strategies for getting that thing rolling downhill at a rapid pace. 🙂

    Best regards!
    Dividend Mantra recently posted…Recent BuyMy Profile

    • EvenStevenMoney
      3 years ago

      It sounds so simple right, just pay off that debt and get that snowball rolling. I think the right mix will be important as we move along over time, I’m excited for the challenge.

  • DH is keen on adding a rental property into the investment mix but it’s something that I’m not too crazy about unless we hire a property manager to deal with the tenants directly. Other than, I espouse Points 1 & 2 a lot.
    Kassandra @ More Than Just Money recently posted…A Ground Stop ReminderMy Profile

    • EvenStevenMoney
      3 years ago

      I think if you have done customer service or researched a topic for your blog that’s what property management is. As far as the maintenance that’s the one that can be more difficult. You could always add REIT’s or something similar for a similar rate.

  • We are doing everything we can to build up streams of passive (or somewhat passive) income. We have traditional investments and rental properties. I hope we are doing everything right! =) At this point, it appears we will be financially independent in around 12 years when our home and two rentals are paid off. We could do it sooner if we were willing to give more things up, but I don’t think we are.
    Holly@ClubThrifty recently posted…Should We Put $5K into a 529 Plan?My Profile

    • EvenStevenMoney
      3 years ago

      Sounds like you guys are humming right along and know the speed and distance you want to go, that’s a great goal to accomplish.

  • Looks like you’ve got a solid plan in place to continue to build up your passive income. We’ve not gotten into real estate yet as it simply comes down to a time aspect with our business. But, that said, we’re definitely looking at it in the future. In regards to bonds vs. dividends I definitely go with the latter especially in this crazy low rate climate. We have a bond ETF or two, but we largely go after dividends.
    John @ Frugal Rules recently posted…How I’m Saving Money on Groceries This WinterMy Profile

    • EvenStevenMoney
      3 years ago

      I guess my question lies more in corporate bonds, I see some of these bonds from good companies offering 5-7% and wonder what would the advantage and disadvantage be? I understand all things being equal if they both offer 3% yield, the dividend stock has the upside, I wonder more in a higher yield corporate bond?

  • I read recently that around 75% of millionaires have gained at least a portion of their wealth in real estate. Interesting stat. I think real estate income along with dividend income is a sure fire way to achieve financial independence
    Dan @ Our Big Fat Wallet recently posted…Handling Lifestyle InflationMy Profile

    • EvenStevenMoney
      3 years ago

      I agree 100%. I believe in a diversified income for financial independence, we are on the same page, perfect!

  • I’m definitely all about number 1 at the moment – trying to grow that portfolio aggressively with growth stocks (and a few dividend stocks). I’d probably start changing my approach more towards dividend stocks as I start looking to live off the dividends, but I still have some way to go 🙂

    On the corporate bonds vs dividend stocks, the main advantage of corporate bonds are they are technically less risky. The company is obliged to pay it’s bondholders first before shareholders get any dividends, so it means less chance of not getting paid if the company starts struggling financially. So for two equal yields of say 6%, the corporate bonds would be less risky on average (i.e. there’s more certainty in getting paid), but as you mentioned, they don’t have the potential to grow as dividends do. It really depends on the risk of the company as to what happens to those future dividends.

    Investing directly in corporate bonds doesn’t seem to be as popular, but probably because the universe of investments is far smaller than dividend stocks. Usually when companies want to raise money, they either go to the bank, or ask shareholders to put more equity into the business – asking to borrow money from investors (i.e. issuing corporate bonds) just doesn’t seem as common.

    At the end of the day, it always comes back to more risk = more expected return!
    Jason @ Islands of Investing recently posted…It’s the BEST! (until everyone finds out) – benefits of going against the crowdMy Profile

    • EvenStevenMoney
      3 years ago

      Yeah I always hear about dividend investors really wanting that constant yield of the dividend return, I just wondered why not corporate bonds. Yeah I think I would love to learn and hear more about aggressive growth stocks versus dividend stocks, I’ll email you some more details. Thanks Jason!

  • Real estate investing and dividend income are at the top of our list for passive income monies. We are thoroughly researching both right now. Good info here, Steven – thank you!
    Laurie @thefrugalfarmer recently posted…Book Review: Achieving Debt FreedomMy Profile

    • EvenStevenMoney
      3 years ago

      Thanks @Frugalfarmer, I think learning and reading as much about this topic can only help you in your decision on what to buy and what works for other people.

  • Great list. I’d LOVE to get into property one day, but I’m not really ready to. I love looking at the net difference of $1,200 rather than just ‘not’ paying $600.
    Christine Berry recently posted…Outsourcing Everything – One Week OnMy Profile

    • EvenStevenMoney
      3 years ago

      Thanks for stopping by @Wealthwayonline, I know real estate is not for everyone but it only makes sense to become knowledgeable about your options.

  • RE isn’t really my favoured investment class, but like you said above to Christine Berry, it’s all about what makes sense to you and what areas you have knowledge in. Knowing your circle of competence is key!
    Steve recently posted…Working Location IndependentMy Profile

  • Nicely done.. This is good option! I will try some of this so that I can make passive income.. I hope I can get great results. Thanks!
    Tarence recently posted…asked “Jordan, what can I s”:My Profile

  • If I was younger I’d be all over the real estate thing, but at my age (55) I’ll probably be dead before the thing is paid off. We’ve done a lot of 1 & 2 though. When I was younger I did a lot of reading about owning real estate but didn’t have any money to invest. *sigh* Opportunities lost….

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