Mission Improbable Part 4: Actively Creating Passive Income

Yes, we’re finally coming to it, at long last! You thought I’d never get to my business plan, my vision, my mission statement, my goals and objectives, my strategies! But yes, I’m getting there!

If the mindset (actually: Mindset, “Bodyset,” and “Spiritset”) were not so important, I would have put the Vision Statement in the first posting. But as a former bean-counter propelled suddenly into the world of entrepreneurship, the first step of realizing the necessary fundamental shift in my world-view was far more important than a business plan.

I have been aware since early on that my business approach would eventually be (at least) three-pronged, involving Real Estate Investment (the “First Habit LLC” part), Stock and Equities trading, and Internet Marketing, or some other kind of Internet-based business. So I began educating myself in all three areas. It made for a somewhat psychotic educational experience, but slowly the pieces are coming together, and I know it’s just a matter of time and effort.

A key goal of my business will be the generation of “passive income,” the Holy Grail of financial freedom. Robert Kiyosaki explains the process in Rich Dad Poor Dad: Poor people earn money from a job and buy “toys” and other Liabilities using that income. Wealthy people, by contrast, use the money they acquire from their jobs to buy Assets, and pay for their “toys” using the income generated by those Assets. That distinction is the definition of passive income: Liabilities cost money, while Assets are a source of money. When you buy an Asset – for example, an apartment building – you can rent out the apartments for monthly rental income. You will be paid that money month in and month out, as long as there are tenants. You earn this income whether you are working your nine-to-five job or not – and that’s why they call it “passive income.” When you earn enough in passive income each month to pay for your day-to-day expenses, you are financially free. You no longer need the job to pay your bills.

A new mentor of mine (whether he knows it or not) is a man by the name of Jordan Adler. I will tell you about my (remote) relationship with this man in a future post. (I’m sure he doesn’t even know who I am – yet.) But he has written a wonderful book called Beach Money, all about the power of passive income (and network marketing – more about that later, too). The “Beach Money” he refers to is money that you earn while you are lying on the beach – true passive income. He explains that when you work a “day job,” you get paid once for your work – you work one hour, and you get paid for one hour of work. But with passive income, you work one hour, and get paid over and over and over again – for years if you work it right. That’s the power of passive income, and that’s why it’s a central goal of my business plan.

Kiyosaki defines the “poverty cycle” of working a job to buy toys and pay bills as the “Rat Race.” Only by generating true passive income can we hope to escape the Rat Race and build the financially secure life of our dreams.

In these tumultuous times, with the threat of failure in the Social Security system, the decline of the dollar, the volatility in the stock market, and the insanity of the privatized health care system in the United States (including the stress that is being put on Medicare), I think we could do much worse than adopt this change in perspective regarding the treatment of money in our lives. Our futures, and the futures of the coming generations, depend on how we decide view the Rat Race – as a necessity based on a dysfunctional misunderstanding of the “work ethic,” or as a destiny to be escaped at all costs. Kiyosaki advocates prioritizing the acquisition of Assets even before monthly bills have been paid – escaping the Rat Race is that important.

As an aside, if you'd like to read an almost Apocalyptic vision of the future as predicted by Robert Kiyosaki's "Rich Dad" himself, pick up a copy of his book Rich Dad's Prophecy - it will scare the bejesus out of you!

Do you own a house? Do you consider that an “Asset”? Let me disabuse you of that notion. A family home is a LIABILITY – not an Asset. Think about it: Do you earn money from it every month? No – you pay money to keep it in good condition. And for what – resale value? I think the recent burst of the real estate bubble is evidence enough that even a family home is not “safe” as sources of passive revenue go.

There are ways to make the acquisition of real estate into an Asset – don’t misunderstand me. What I’m saying is that if you are counting on your family home as a “nest egg,” you’d better at least build a second nest to put some eggs in. Putting all of your eggs in the investment-basket of your family home is risky at best.

So what is the best Asset you can buy, when you’re just starting out? Is it stocks, bonds, or rental units? Is it gold, or other commodities? I’ll submit (along with Robert Kiyosaki, by the way) that the answer is Financial Education. Education, an “Asset,” you ask? Yes, Financial Education is perhaps the most powerful asset, because once you have it you will be attuned to the vast world of opportunities out there, and be in a position to wisely discern which opportunities are in your best interest.

As a former accountant, I understand Robert Kiyosaki’s Assets/Liabilities formula very well. But as clearly stated as it is in his book, I can tell you that this equation was never presented this clearly in any of my accounting classes. We learned how to keep track of other people’s money – not to build wealth for ourselves. This is an entirely different skillset, and a powerful distinction: true Financial Education is learning how to recognize and acquire Assets, and determine with reliability that they will generate passive income.

So having left my soul-depleting job back in February, and having now read Robert Kiyosaki’s powerful book Rich Dad Poor Dad (have I mentioned that this book is a must read?), I determined that my first course of action would be to expand my Financial Education.

As I said, my educational experience in the past six months has been psychotic – perhaps “multiple personality disorder” is a better description – but I know it will eventually come together in a workable package – it will just take the addition of that magic concoction of “Practice, practice, practice.”

I’ll speak more about the education I’ve pursued in a subsequent posting. Stay tuned!