Passive Income: I do not want to go back to working 50 plus hours a week, ever.

Goals

First, what are your goals?
  1. To supplement your income – Maybe your goal is to reduce the amount of time you work for someone else, to free up time to allow you to dedicate more time working towards building your own business, or you want to spend more time with family, or traveling.
  2. To replace your W-2 income – set a goal, set a timetable, list steps to achieve goal, implement, reassess, readjust.
  3. As a strategy to move a low – risk, low interest savings account into a higher earning, higher – risk account
  4. To make your substantial, short-term income last longer – A professional athlete such as a football player may only be projected to play for 3 to 4 years. How can they make this income last for 20 years? Maybe you won a million-dollar lottery prize or some such situation where you receive a large, lump-sum of money and want to ensure it lasts for years.
  5. To save for an Emergency Fund or College Fund
  6. To save for retirement
    • Annuities – – “Annuities are contractual guarantees between you and an insurance company, either as a single deposit or multiple payments. In exchange, the insurance company follows through on the terms of the contract. Annuities grow tax-deferred until the interest is withdrawn, and payments can be taken as a lump-sum (which, although I’ve seen it, is not what I’d recommend) or through periodic distributions.” Carlos Dias Jr, Wealth Advisor
    • “As another example of growing annuities, suppose you need to accumulate $100,000 in 10 years. You plan to make a deposit in a bank now, at Time 0, and then make 9 more deposits at the beginning of each of the following 9 years, for a total of 10 deposits. The bank pays 6% interest, you expect inflation to be 2% per year, and you plan to increase your annual deposits at the inflation rate. How much must you deposit initially? Thus, a deposit of $6,598.87 made at time 0 and growing by 2% per year will accumulate to $100,000 by Year 10 if the interest rate is 6%.” (1)

How to achieve your passive income goals:

  • Monthly Example:
  • Calculate the amount of money needed per month-include monthly expenses (i.e., rent, mortgage, insurance, property taxes, utility bills, disposable income needs)
  • Calculate how much initial investment is needed to achieve your goal.
    • For example, your monthly expenses are $2,000. What mix of income streams will equal $2,000 monthly? An investment of $10,000 in monthly stock dividends that yield 3% will yield $300 monthly. You are a freelance writer, you sell a product on Instagram, you have a mix of 6-month and 12-month certificates of deposits (CD), calculate.

*Note– Never, ever, ever, ever, ever put all your money in one investment (see When the Feds Raided). “My friend is starting a restaurant so I gave them $50,000 in seed money.” Restaurants have a very low-profit margin as does any business in a hyper-competitive industry. I personally would never invest in anything associated with a friend or acquaintance. Speak with an accountant before you invest large sums of money. An accountant can assess the risk, historical industry profit margins, and calculate the time value of your money. Your investments should vary in risk – CDs, most bonds, annuities, HSAs are low-risk investments.

Stocks vary in risk – if beta equals 1.0, the stock has average risk. If beta > 1.0, the stock is riskier than average. If beta < 1.0, the stock is less risky than average.

(1) Ehrhardt, Brigham. Financial Management Theory & Practice, Thirteen Edition.

(2) Internal Revenue Service. https://www.irs.gov/taxtopics/tc409Topic No. 409 Capital Gains and Losses.” Accessed Jan. 5, 2021.

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Published by Williams Accounting LLC

Williams Accounting LLC is a Las Vegas-based accounting, tax, and financial consulting firm that works with clients to achieve the best solutions for their business.

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