I’m 16 and I’ve started a business that earns $3,000 monthly. What should I do with it?”
Here was my Answer:
Passive income is the way to go. You can either create it (start a business) or buy it (dividend stocks, rental properties , bonds etc. )
Or you can do both.
I spend my time and energy creating businesses that don’t need me around. Then I take the money earned and invest it into more passive income.
Now you have your business and a passive income investment (2 streams of income!)
Passive income gives you freedom, especially freedom to travel. When you have more passive income than expenses, then you are free to live the life you choose! (I call this The Cash Flow Lifestyle)
I really knew this was real when I began to invest money I earned from rental properties I purchased in my early twenties and invested into dividend stocks (Reits and boring Energy companies mostly)
One month I had to replace an AC unit so the property management company just used my rental funds to pay for it, so I would not receive any income that month. However, that was also the first month that my dividend payouts were more than my monthly rents!
I realized then that it wasn’t just talk, passive income is real and if you focus solely on increasing it and adding new streams while keeping your monthly expenses low (rent a boat instead of buy, own a home you can afford or don’t buy one at all and travel instead) then you truly can have the freedom you eread about in books like Four Hour Work Week.
Lastly: congrats on your early success! Just stay humble.
What Exactly is The Cash Flow Lifestyle and Why Is Cash Flow So Important?
As I originally explained in 2011 with What Would You Do With A Million Dollars, the United States went off the gold standard officially in 1973. In short, the US Dollar was no longer backed by gold. Instead, the US dollar was merely ‘worth’ whatever the US Government said it was worth.
When the US and the Allies won WW2, the Bretton Woods conference put the US in a position unseen before in the history of society. The result was that the world, minus the US, was destroyed and needed rebuilding. The US lent all the major countries money forcing all major countries to tie their currencies to the US Dollar, which at the time was backed by actual gold.
Not after 1973. As a result of the Vietnam War, and decades of not having to worry about fiscal policies that made sense, the US was in a position where it needed to create more money that we had. Since money is simply the belief in a system that essentially isn’t ‘real’ anyway, who was going to question us?
So why does this matter? Well for you, it means everything you have been taught about money is outdated and wrong. Maybe not everything, but for the sake of arguing lets just start over from the beginning and go from there.
The world we live in now rewards people that borrow money. Yes, if you borrowed money to buy 4 houses you couldn’t afford in 2006 you were punished, but that was dumb because you should never buy something you can’t afford. But if you have debt at a fixed interest rate, it gets cheaper over time, just like your savings gets cheaper over time if its not tied up in an income producing asset like stocks or rental real estate.
Mutual Funds are a terrible investment. Most people invest in mutual funds because they have heard of them before and they like the idea of choosing between “aggressive and moderate” instead of putting thought behind where their money goes. But why are they so well known? Could it be because mutual funds spend a lot of money promoting themselves? Where does this money come from? (Click HERE for a GREAT book on this topic written by Tony Robbins.)
The Government raises money by selling bonds, then repays them by printing money. This is the simplest way to understand the current system. No, we won’t ever default to China because we can just print more money and pay them off. Other countries don’t have the luxury as their money is tied to ours, and because oil is also priced in US Dollars.
So what does it all mean?
If you have savings in a bank account, you are losing about 3% of its value every year to inflation. if rapid inflation hits, which is pretty likely given how much money we have been printing since the recession, then your savings will be hit even harder.
If you are investing in a mutual fund and ‘have a guy’ that manages it for you, then you are in the same position as a savings account but with more people charging you fees.
What should you do?
Focus on your cash flow. Focus on more money coming in than going out every month. You don’t have to start the next Facebook or Uber, but you should consider businesses and projects that can generate a few hundred or thousand dollars a month for you.
Your primary mortgage is the best loan that you can get and is secured by an asset. You have to live somewhere and its important that you own your residence. Some residences are better than others when it comes to investing, but we are speaking in generalities for the time being.
When it comes to your savings and retirement, stop thinking big pile of money, and instead think of income stream.
How can I make more money next month than I made this month is a question I ask myself every month. Even if its just a few more dollars, every little bit matters.
When I invest in stocks, I look for stocks with dividends.
When I invest in real estate, I look for cash flow rentals.
When I start a new business I ask myself how long do I need to work on this until I can walk away and have it still produce income?
The Problem With Trying To Save A Big Pile Of Money:
How big of a pile of money do you need?
Is this pile getting bigger while you sleep, or if you are sick, or if you are traveling? Or is it getting smaller because of inflation and people charging you fees?
What is your end goal? To retire and start spending money from this pile? What if you out-live your pile (which should be a good thing) or what happens when you get older and your cost of living actually rises so your pile shrinks faster than you thought?
Is your solution to turn that big pile of money into income at retirement? Why wait? Why not start now? How much income will your big pile of money produce anyway? What if you found a way to produce that with passive income so that your pile never gets smaller and you could retire sooner? This is The Cash Flow Lifestyle!
Pay Yourself First! As long as you pay yourself first and invest that money for future you EVERY month, you can then spend what is left over. Budgeting sucks, and study showed that even financial planners don’t budget. Its too hard. Instead, as long as you pay yourself first you are free to spend what is left over. If nothing is left over, then shit, don’t spend anything that money and work harder for next month.
Invest in Yourself! We live in the most incredible time right now. All the information you could ever want is available to you for free. Well, mostly free. You still need access to the internet which can cost money as well as a computer or smart phone, but guess what? These can be investments! Don’t be stupid and buy things you can’t afford, but also don’t skimp on things that could help you get better, smarter and eventually wealthier. (Start here: (Cash Flow Resources)
Never Stop Educating! It doesn’t matter how old you are, school never ends! If you have a job you need to know everything about that job so you can get better, then more valuable and eventually invaluable! You do not need to go to an actual school to do this, the skills matter more than the degrees. (Read: How Much Is Too Much To Spend On Knowledge?)
The Power of Compounding Is Your Salvation! Whether its your personal life where you decide to make better decisions with your health and money, or your financial life where you commit to investing in dividend paying stocks for the next 20 years. (For better life choices and the impact they will have on your life read: The Compound Effect by Darren Hardy
What’s the point of all this?
The old way doesn’t work anymore. Relatives that lived through the Great Depression urged saving because they know what can happen when times go bad. But that was before 1973 when dollars yesterday were worth the same tomorrow.
Now you need assets. Preferably income producing assets.
If your goal was to save $1,000,000 so you could ‘invest’ it and return 5%, that means $50,000 a year or just over $4000 per month. How long would it take for you to save one million dollars? Assuming nothing went wrong, whats your best case scenario?
By the time its saved, what has inflation done to it? Assuming a best case scenario of 3% a year for X years, how much value is that one million dollars really?
Then assuming all this went as planned, how are you going to turn your million dollars into $50,000 a year? Are you just going to give it to someone and hope for the best? Is he going to charge you? (Yes he is) How much? Will he pay you if he loses your money? (No he isn’t)
If this doesn’t sound that exciting to you then you aren’t alone.
If you are ready for a lifestyle change then you aren’t alone.
You do not need to be an expert to start investing, but you must start investing if you ever want to build wealth.
I look around and I don’t think I have ever met anyone as lucky as me. Yes, I was born in America, so I already won the lottery, but it gets better!
I was born in 1984! Why is this important? Because this meant if I followed societies expectations, I would graduate high school in 2003. And I did!
Stay with me…
Because I graduated high school in 2003, this meant I began college a few months later in the fall of 2003. Despite spending a few quarters (University of California Schools are on the quarter system, not semesters) on academic probation (including a personal letter I had to write to the Dean begging to keep me enrolled), I managed to graduate in 4 years, meaning I entered the workforce in 2007!
Do you remember 2007?
In real estate history, 2007 is not looked upon as a positive year. In fact, most of our economy doesn’t look back on 2007 fondly.
You can trace back the peak of the housing market to between 2005-2006, depending on which part of the country you are looking. Prices kept skyrocketing… until they stopped.
Think of 2007 as Wiley Coyote from The Looney Toons cartoon. Prices are about to collapse, but as long as nobody looks down, everyone can buy themselves a few more seconds of ignorance and stability.
So here we are, it’s 2007 and I enter the workforce! Corporate America here I come! How lucky am I?!
I am hired as an assistant marketing consultant for an environmental consulting firm. Sounds pretty neat right? It wasn’t.
But lucky for me after I returned from a 2-week training program in Indianapolis (I was based in Newport, California) only to discover that the boss who hired me had left the company!
So now I had several bosses! Thats cool right? And no ‘real’ job description any more. Thats sustainable, right?
Here’s the thing. I hated my job. I hated my job more than you have ever hated a job. I don’t need to go into details about how I travelled 25 days a month, worked 60-80 hour weeks for extremely low pay while living in a very expensive city that I barely saw except when I was flying into and out of John Wayne Airport, LAX or Burbank (depending one whichever was cheapest or involved the longest layovers).
It is very possible that the greatest attribute any entrepreneur can have is a complete disdain towards working at a job. I consider myself very lucky to have this attribute.
Did I mention I was a coward?
Maybe coward is too strong of a word, but maybe it isn’t. I absolutely despised working at this job. My friends saw it in me.
I was terrible to be around, and any free time I had was usually filled with a lot of alcohol. It went on like this for WAY longer than any sane person should allow.
I was completely unappreciated and at any time I could have put a stop to it.
(My wife and I are currently watching Orange is the New Black on Netflix, and all I can compare it to is voluntarily getting up every morning and driving to prison for the day, only to do it all over again the next day.)
So why would I do this? We already established that I was a big fat scaredy cat.
Was it fear of the unknown? What would I do for money?
What would my friends think if I was unemployed?
What would my parents think if I quit my first job?
What would my mom think if I no longer had health benefits?
Whatever it was, it was strong enough to keep me doing something I despised for quite a while. But good thing I am lucky!
By the time the recession reached the west coast, my company had seen at least 3 rounds of layoffs before it was my turn.
I have touched on this before, but I was legitimately “Up in the Air”d.
It wasn’t as bad as getting fired over the computer, but it was a 3rd party company doing the dirty work.
So its 2008. Mid-Recession. I am 24 and unemployed, so I moved back in with my parents! How lucky!
All of these things were happening to me, (for me), and I had no control over them. I was too afraid to quit a job I hated, but was eventually fired! How many people get to experience this level of good luck in their lives? I assume not many.
But I did!
2008. Crazy recession going on. Living at home with my parents, back in Scottsdale and out of California where all my friends and “business connections” resided.
All of my biggest ‘fears’ had come to fruition. How lucky!
Do you know how freeing it is to be so afraid of something, and then to experience it?
Its pretty hard to be afraid of hitting rock bottom if it means moving up a level.
Armed with my only attribute of “never wanting another job again”, I decided I would never have another job again. What was the worst that would happen? I’d end up at home with my parents at 25 instead of 24?
So I took a risk. And then another. And then another. Now these were very calculated risks. In fact, they weren’t really even risks.
After studying Robert Kiyosaki for a few years, I was well aware that he made lot of money in real estate after the savings and loan crisis of 1987. In fact, he did it in Phoenix. Phoenix is where I was, and there was a new crisis. How lucky!
I begged, borrowed, and stole all the money I could find, in order to buy single family homes in Phoenix. People told me I was crazy to be buying houses. Today, they tell me how lucky I am.
I tell them, I know!!!
I was born in America in 1984. The way the American education system is aligned, this meant I graduated from college after 4 years in 2007. There was a global recession underway that I had no control over. It didn’t start earlier, it didn’t start later.
I was fired from a job I was too afraid to quit.
At age 24, unemployed and a complete failure, I moved back in with my parents.
No one is luckier than me!
In the following years; several companies founded, many houses bought, rented and sold, websites developed and books in the pipeline, a loving wife and beautiful family. All because I am nothing but a big scaredy cat. At least I was.