A Paradigm Shift and 5 Reasons to Love Passive Investing
When it all Changed
If you asked a 30-year old me what my plan was I’m pretty sure I would have responded that I wanted to “move up the chain” at work, make as much money as possible, and develop a side hustle that would one day become my main gig. I didn’t really think about it in terms of income streams like I do now. I was always good at saving money, living below my means, and putting cash away. I was climbing the ladder at work, and with limited time and making enough money to keep me complacent, put aside searching out multiple income streams or a side business.
That is the pattern I’m sure with many people.
Then as the Great Financial Crisis (GFC) was kicking in around 2009, the engineering and development industries were laying off management to “lighten the cargo” or “rightsize”, I became part of the statistic of people that lost their job during the GFC. That was a Monday.
The same week I received a call that my father was in the hospital. I flew to Florida and when I arrived they informed me that he was not going to make it. That was Friday.
You talk about your tough weeks! Two things I valued and assumed would always be there, like a parent and an aspiring career, were gone. The rug was completely pulled from underneath me.
It all changed for me that week. I realized from my father that we should never stop chasing the dream and to take action before I’m old. I learned from the job loss that I would never again depend on anyone else for my livelihood. Never again would I allow others to determine my success in life. The paradigm shift occurred and I would never again be the same.
12 year later
I followed the plan. I think the business plan was one page. It said “buy rentals”. So instead of working 60 hours per week in a corporate sweat shop I took the less demanding public servant career with a pension kicker. You know I LOVE retirement income too! This less demanding W2 allowed me to work on our family’s passive income streams on nights and weekends instead of preparing for work proposals and marketing pursuits….LOL….that is precisely where the other path leads.
Last year, when I retired from spending 40-50 hours per week working in the Civil Engineering industry I moved my time to 100% passive. When I had a full time job passive investing was a spare time “hobby”; something I did for fun and to build my investment income one day to surpass my active income and take it’s place.
Let’s first define some income types:
- Earned Income:
- This includes wages, salaries, bonuses, and commissions from your job.
- Tax rates can vary based on your total income and the tax brackets
- Passive Income:
- Passive income includes earnings from activities in which you don’t actively participate, such as rental income, dividends, interest, owning ATMs, etc. LOVE all types!
- Tax rates for passive income can also vary depending on the source and local laws. Depreciation losses which are phantom losses are available to use in this income type.
- Investment Income:
- This includes capital gains from the sale of investments like stocks, real estate, and other assets.
- Tax rates for capital gains can be different from regular income tax rates. They might be subject to lower rates if you hold the investment for a certain period (long-term) as opposed to short-term gains.
- Self-Employment Income:
- If you’re self-employed or run a business, your income will be subject to self-employment taxes in addition to regular income tax. Yuck!
- The tax rates for self-employment income can be higher due to the need to cover both the employer and employee portions of Social Security and Medicare taxes. Yuck!
- Retirement Income:
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- Income from retirement accounts like pensions, annuities, and distributions from retirement plans like 401(k)s and IRAs. LOVE these!
- Tax rates for retirement income can vary based on the type of account and the tax treatment it receives.
- Royalties and Licensing Fees:
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- Royalties are payments received for the use of your intellectual property, such as patents, copyrights, and trademarks. I wish I had more royalties!
- Tax rates on royalties can depend on your country’s tax laws and any applicable international treaties.
I know, I know, there are many different “types of income”, not all my favorite, but I listed them to illustrate just how many income streams you can investigate and use to set you free.
My core favorites fall under “Passive Income”. Here are five reasons to LOVE Passive passive income:
- “Working the front end” – The reason they call it “passive” is because you’re not trading your life hours, 40 hours a week or more, for a paycheck. You might do a ton of work for several weeks or several months on the front end to purchase a property or invest in a mortgage, purchase a billboard, or invest in an ATM fund, but once that front end due diligence is over, most of the time you’re doing very little except looking for ACH deposits in your bank account.
- Freedom – As I’m sitting in Starbucks sipping a morning coffee on the patio watching people scurry in to take their coffee on the run to the freeway and then to get to work I am very thankful for the life I chose. With the systems in place I can literally work from anywhere. Italy, Hawaii, northern Spain, Australia, you name it.
- Autonomy – I had enough silly “Performance Reviews” in my 26 years in a corporate job to last a lifetime. Vacation request procedure? Bonus? Now I give them to myself.
- Limitless – Most professions cap out at a specific salary range. And most of the ranges are a decent existence in the engineering field, but there is a limit to what you can make in salary. And after Uncle Sam has taken his share it’s usually quite unremarkable. With passive income there is literally NO LIMIT! How much do you want to make?
- Generational – Once I’ve acquired assets to create passive income streams it’s on autopilot for my lifetime, my children, my grandkids, and their grandkids, and on and on. Yes, you do need to get out of investments and into new investments but generally the turn over of capital is slow and new transactions very infrequent. Passive income creates legacy wealth; I will teach my children everything I know and have learned over decades. This is life changing powerful stuff.
Please smash the “like button” or leave me a comment if you found this information useful.
Best,
Derek
Derek Petersen
Chief Compounding Officer
Aviara Capital Investments
www.AviaraCapitalInvestments.com
www.linkedin.com/in/derekpetersen
Disclaimer: I am a financial independence guy and a financial freedom hack. I am not a financial advisor, a CPA, or a broker of anything. I recommend discussing financial decisions and/or planning with the professionals.