Passive Income - The secret to Wealth Creation

Passive Income – The secret to Wealth Creation

Who wouldn’t like to have, no money worries, to be on a cruise, tasting the malts and Sangrias, while pursuing your passion or thinking about your next adventure.
Most people would prefer to have the flexibility of going to work when they please and stay at home to take care of your family without having to worry about money.
I myself won’t mind writing a book sitting on a secluded beach in a Pacific Island or playing rounds of Golf at one of those idyllic Scottish Golf Courses, and still have my bank account being regularly credited every week and every month.

This dream life may not be possible for most of us but can actually be created with the help of Passive Income.

They say that the average millionaire has seven different streams of income. That doesn’t mean they have seven jobs but,Most millionaires have figured out the passive income game.

 Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it. The word “passive” implies minimal time and effort in maintaining a steady income. Creating genuine passive income is the holy grail of personal finance but not all passive income is created equal.

Generating passive income requires a lot of effort and sacrifice in your initial years. The basic question is to enjoy now and sacrifice later or sacrifice now and enjoy later.

I want to share one very powerful story which  I recently read in this wonderful book, The Parable of the Pipelinewritten by American author Burke Hedges.

It so happened that there were two boys Bruno and Pablo in a village who were unemployed.
 So the mayor of the village called the boys and said, we have a crisis, we need water in the village. The village tank is empty, we need water from a nearby river and every day both of you will carry water from the river and put it in the river tank.
For every bucket of water that you carry, you will be paid some money.  It sounded like a nice idea and both Bruno and Pablo agreed to it.  
From the next morning both of them took a bucket and they started going to the river,  filling the water from the river and emptying in the village tank and again going to the river  and repeating the exercise and for every bucket, the Mayor paid them money.

This went on for a few days & they realized, it’s a very tedious process and Pablo thought why don’t I build a pipeline.  “If i run the pipeline along the way from the river to the water tank, then the pipeline will carry water and  I won’t have to carry it anymore.”

So he went and he shared the idea with his friend. He said, “look if we build the pipeline, then we don’t have to put efforts on a daily basis. The pipeline will carry the water for us, but Bruno was not interested because he would have had to invest time money and energy in building a pipeline. He was happy carrying his buckets, so he tells Pablo, you please go ahead, I am happy the way I’ am.

To cut a long story short, Pablo starts working hard despite the criticism. Despite the ridicule, he builds a pipeline and slowly water starts flowing from the pipeline, day in and day out.

Pablo becomes a free man. When he is sleeping, his income is on, pipeline is carrying water for him. When he is on a holiday or when he is partying with his friends, his income is on.

Bruno on the other hand, the day he takes an off from work, his income becomes zero,  the day he is sick, he’s tired, his income becomes zero. Pablo doesn’t have to bother about all that.  Slowly Pablo starts building a pipeline not only to his own village but to all the villages around and as a result, many people like Bruno get unemployed.

You may wonder, what’s the big thing in this, it is so obvious, everyone should always build a pipeline. But 95% people in the world are bucket Carriers, only five percent people, are the ones who have created pipelines in their life and enjoy the benefits.

The Theory of passive income  is about making money work for you instead of you working for money, through creation of assets and income streams, which help generate continuous income.

Dhaval Bathia, in his book “He swam with the sharks for an Ice Cream” writes about the 7R theory of wealth creation and how to create pipelines.

The 7 R are as follows:

In the pre Industrialisation era, there were only two ways to generate income,

1. Rate – Man produces goods and all the goods had a rate and by selling goods, you generated income.

2. Remuneration- The second way of generating income was by providing a service. By providing services, people got remuneration.

Either people used to work and get paid a remuneration or they produced products and goods for which they got a rate or value.

In both the cases, their presence and active involvement was necessary. They worked and got paid and when they couldn’t work, they didn’t get paid anything.

The above two examples are of active income. That means, if you stop doing or working, it stops generating income, leave alone create wealth.

The time to put in effort is when we are young and not ravaged by disease or burdened by family obligations. When we are young, we’ll be able to maximize our investment and have financial independence when we are older.

The other 5 R are passive income streams, which means without active participation, we can generate income.

3. Replication – With Industrialisation, came replication. Machines could reproduce the product once it had been designed. For example, you write a paper and sell it to someone, you get money. Now in the pre Industrialisation era, if you wanted 100 copies, you had to write 100 copies but now a machine makes 100 copies without any effort. Machine has replaced human effort or active effort.
The most famous example of replication is of an actor who used to work in a theatre and had to be present to perform the act and get paid for it. Then came movies, and once the performance had been recorded, the actor did not have to be present for the audience to see his performance and he got revenue every time the movie was screened.

4. Rent-rent is a wonderful way of creating passive income. Rental income is free without your putting any effort and that becomes your extra pipeline in your life. You have a property or vehicle or an equipment, you can rent it to generate an additional and passive income.
Property is the best because you also get price appreciation on your property. Renting property, product, IPR or any other services or goods can create continuous passive income. You can even rent out your car when you are not using it with a company like Turo. There are agencies and sites where you can rent out a room in your house for a B&B or to a Paying Guest(PG) or register with Airbnb and create a passive source of income.

5. Royalty- By writing books and publishing it, the author can earn royalty income for the rest of his life. Every time someone buys that book, the author gets royalty income.  There are other ways as well to generate this type of income. The makers of Candy Crush get royalty income every time you download or play the game on your mobile. Every app creation, you tube video, blogs that you upload in this digital world, are all a source of wealth and passive income, which will keep giving you income on every use or download.
Apple has now a revenue stream which is more than the GDP of 150 countries, simply because every time anybody in the world downloads an app, a certain portion as royalty goes to the parent company.

6.Rights- By selling rights on certain Property, concept or idea, a person can generate  income. The most common form is franchise rights.
McDonald’s for example has more than 36000 restaurants worldwide. Every time you buy a burger or fries, a certain percentage goes to the parent company. Imagine the volume, the revenue share that is like 36,000 pipelines working for you day in and day out, just by creating a brand and by giving a franchise.
JK Rowling ,before Harry Potter, was struggling financially, but after Harry Potter became a brand, she gave rights to Leo Mattel for toys, to Electronic Arts for Harry Potter games, To Universal Studios for Harry Potter theme Parks. Now every time you buy a Harry Potter Toy, or download the game, buy a book or Visit the theme Park, Rowling gets a share, and as a result, she is now one of the richest women in UK.

7. Returns- By investing in the equity market, many people get financial independence by the returns received on their investment. Returns come from the equity market both in the form of dividends and appreciation in the price of the stock. You also get returns from your investments in Bonds, NCDs & FDRs and you get a steady income for which no active work is required from your end.

Our advise to all our young clients is to target, an income from investments should be more than your income from profession by the time you are 45 years if not by 40 years of age. This will give you the flexibility to do what your heart desires, to pursue a passion, take a sabbatical and not be bogged down by the daily grind.

Everything passive first takes active energy.

There is so much you can do once you generate enough passive income to pay for all your living expenses. I highly encourage everyone to at least try.

Another rule of financial planning is that, all essentials should come from your business and profession income and all luxuries should be paid from your passive income. Don’t buy that luxury car or vacation abroad or indulge in the beach house you always desired till the time you can pay for them from your regular passive income.

In essence, what it means is that before you decide to buy your luxuries, create a source of Passive income from Rent, Royalty, Rights or returns and then let that passive income pay for your luxuries.

For this to happen, you have to target, to create a budget surplus. Budget surplus can be generated by doing proper allocation of resources and ensuring you never spend more than you earn.

The next important thing to understand is the difference between saving and investment. Saving is just hoarding cash and investment generates returns.

Another essential thing is to start your investment journey as early as possible and let compounding do the work for you. The earlier you start, the better it is and lesser you need to invest.

The next thing you need to keep in mind is to Concentrate on Income Producing assets rather than on growth assets.  Initially invest in assets which can give you running income like dividends from shares, interest on bonds and rent from real estate.
Growth assets or asset income comes when you liquidate the asset whether fully or partially.
It is like when you have a chicken, options are, you can get an egg from it every day and that is a running income or you sell the chicken and get the profit and that is an asset income.

Achieving Financial Independence is a process and creating passive income source is an integral part of that process.

In todays digital world, people are creating multiple sources of income and passive income by investing in crowd funded real estate projects to create rental income, peer to peer lending, affiliate marketing, writing content, blogs, social marketing, providing solutions, webinars, creating you tube educational videos, create an online course on Udemy, selling stock photos on Depositphotos, sell digital files on Etsy, network marketing, creating a lead generating website and capitalizing on many more such opportunities available in abundance.

As you can see there are a ton of ways that can help you make passive income. So if you’re tired of the traditional way of making money, Implement a few of the passive income strategies above so you can start working less and making more money while you sleep today.

It may take a substantial amount of time or money in the beginning but I can promise you earning passive income will give you returns that you have not even bargained for.
Pick an idea, make a plan, and dedicate yourself until that income stream comes to fruition.

Happy Investing!!
Stay Blessed Forever
Sandeep Sahni

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sandeepsahni@sahayakassociates.com,info@sahayakassociates.com

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Note: All information provided in this blog is for educational purposes only. They don’t constitute any professional advise or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.

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