A guide to financial independence

The power of passive income

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Why passive income?

While there’s nothing wrong with a regular job, I have always been obsessed with the concept of passive income after coming across the “Financial Independence, Retire Early” movement in my early 20s. Since then, over the last 12 years, I have done everything possible to create a lifestyle where passive income covers my entire cost of living - plus some - regardless of how much, or how little, I decide to work.

Let me share my journey and give you a practical framework to achieve financial independence. Mind you, there’s no overnight cure. But this framework will get you started on the path to earn $100 a day down the line, as long as you follow the principles and stay consistent.

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Two approaches to passive income

Let’s understand the concept of passive income. It’s not magic money. You’re simply trading something that’s valuable today to create an asset that’ll generate income for you in the future. This trade can be of two types.

1. Investing your money

2. Investing your time

Both these approaches have their pros and cons. Let’s get started.

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Investing your money

The principle behind investing your money is not betting everything on the winning horse - Rather, it’s to get into the habit of making your money work for you. Think of it like sending out a $1 bill whose only job is to recruit more pennies to work for you. And the pennies that are recruited will go out to find more pennies, and so on. Before you know it, your money starts multiplying. This is the principle of compounding in action. It’s hard to grasp intuitively because it takes time to act.

But there’s a catch - You don’t get something for nothing, and there's a tradeoff here. It takes time to scale up to $100 per day, and you can choose to put in a lot of work or a lot of patience. There’s always a risk-reward factor that comes in with investing, and the risk can be offset only by time or the work you put in.

Index funds

The best example of investing with patience is to use Low-Cost Index Funds (Bet you didn’t see that coming, hehe). An index fund covers a wide variety of stocks and markets which you can buy into for a very low price. For example, for about $100, you can own one share of VTSAX or VTI which tracks the S&P500. This gives you a piece of the entire United States equities market!

S&P 500 Performance (Source: Google Finance)

The historical returns from the S&P 500 have averaged about 10.7% a year which amounts to a 637% increase since 2002. If you had invested, say $10,000 back then and just stay put, you would have about $73,700 now! Well, it’s not practical to invest this way for most people, and you’re better off forming a habit of investing a small amount in an index fund of your choice every month.

The advantage with Index funds is that diversification reduces risk and you can

The downside is that it might take a long time before your portfolio starts bringing in $100 a day. But that’s the cost you pay for reducing risk.

Dividend funds

Sometimes you also get paid a dividend, a small percentage of your total investment just for buying in. Though the dividend yield looks small at 1.3-2% a year, you also have to remember that as the value of your investment rises, your dividend payout will rise too! This way, your $1,000 investment can return $60-$80 for no effort on your part.

Here, you can either optimize for growth or optimize for dividends. A fund like SPHIX might have almost zero growth compared to the S&P500, but it gives a 4.9% dividend yield on your investment that gives a steady stream of passive income. Or if you do your own research, you might be able to pick your own dividend stocks - but there’s a catch as always. Sometimes the stocks and dividend indexes perform poorly and though the dividend yield is high, there’s not much in terms of return. Always choose the company over the dividends!

S&P500 vs SPHIX. SPHIX has no growth but high dividends (Google Finance)

How much to invest?

The best strategy in such cases is to work backward and see what your investment goals are and how much risk you can stomach. At an 8% annual return, earning $100 a day requires an investment of about $460,000 - But you could just split this investment into a monthly installment of how much you can afford to invest.

• At $400 per month, it would have taken you about 25 years to hit $460k.

• At $520 per month, it would have taken you 20 years.

• To do it in 10 years, it would have taken $1,750 a month!

An index fund is the safest option if you want passive income to be automated in the background. But if you want something that takes a little more effort and reduces the time horizon to reach $100 a day, I have just the thing for you.

Real estate

You guessed it. Real estate is one of the most lucrative sources of passive income, but as someone who’s been in the field for a while, I can tell you that it’s not so easy for a beginner. There are two routes you can take:

1. Investing through a REIT

2. Investing in NFTS... just kidding - Physical real estate

Real estate usually requires huge upfront investment and field experience to make correct judgments, putting it out of the reach of beginners. This is where REITs come in.

REITs

A REIT (Real Estate Investment Trust) is just like buying stock in a company, but instead of running a product/service business, the company owns and manages real estate. In exchange for your investment, they’ll pay you a portion of their rental income as a dividend. The REIT can specialize in any area - from medical buildings to shopping centres to residential apartments - and they provide a fantastic opportunity for small investors to get into real estate. This frees you from both the huge capital requirements and the headache that comes with maintaining a physical property.

Even in my case, I chose to balance that out my physical real estate with some REITs -like, Simon Property Group and Preferred Apartment Communities. And those have been WAY EASIER to own than trying to buy real estate throughout this last year.

Source: Google Finance

The downside to this, however, is that you can’t leverage your money as you do with real estate and you can’t get all of the amazing write-offs and tax advantages like you do when you buy a property yourself. The upside is that anyone can buy into REITs, with nearly any amount, and if you want to make $100 per day in dividends - this is probably something I would incorporate into your portfolio over the long term.

Rental Income

Even though REITs are great, rental income from owning physical real estate is one of the most effective ways of making $100 a day even if it involves a bit more effort. It’s what I did full time for the first 10 years of my career and there’s no better way to build wealth if you are patient and understand the market. The catch? You need:

1. A credit score above 700

2. A steady source of income

3. Down payment of 10-20% saved up

But if you have these, here’s how you can do it.

Let’s say you find a house worth $300,000 that needs a little work, and in the current condition, it could rent for $2,500 per month. You could buy that home with a 15% down payment, which is $45,000 - and your mortgage payment would be $1,160 per month at a 3.6% interest rate. The expenses won’t stop there. You’ll also have property taxes, insurance, repairs, and vacancy, and that might cost you another $600 per month. So your total overhead to own and keep this home, every single month, is $1,760.

But, once you close on the house say you spend another $20,000 fixing it up, replacing the floors, doing some light paint, fixing the landscape, etc. instead of renting it out immediately. Now the home is worth $360,000 - and you can rent it for $2,850 per month! You’ll have $1,090 PER MONTH left over in profit, and if you repeat this process once every other year, you can get to $100 per day in passive income in about 7 years, not even counting the equity you build from paying down the mortgages at the same time.

Of course, I’m making it look easier than it is. Housing is expensive and extremely competitive and it might take months to find a good deal (if you’re lucky), and there’s a steep learning curve involved, so it’s good to have someone who can guide you through the process. But if you can get started in this, it’s one of the most reliable routes to $100 a day, hands-off.

If this is something that interests you, check out my Real Estate course that will take you from beginner to pro.

Now that we’ve seen how we can make your money work for you, let’s take a look at the other big one - how we can get your time to work for you.

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Investing your time

It’s almost a cliche at this point that the richest people are the ones who use their time wisely - but it’s a cliche because it’s true. There’s a concept in economics called time preference, which is about choosing whether to spend time (in pleasure) or invest time (for later). The key concept in investing your time is also compounding, but here it’s about building assets with your time that will work for you in the future.

Let’s take a look at a couple of examples.

1. Making content

2. Providing a service

Making content

If you have the spare time, and an inclination to express yourself in some way, now is the best time in the history of mankind to convert that into an asset. Personally, I chose YouTube because I have a passion for talking to myself sitting alone in a room, and it’s an option I would recommend to anyone with a camera and an interest in making shocked thumbnails.

Shocked thumbnails FTW

Content is king, but when it comes to content, YouTube is still king - It receives over 1.7 billion unique monthly visitors and it’s the world’s second most visited website. With the ability to build a library of evergreen content that just grows with time, the freedom to create any number of channels, and so many different options to monetize, YouTube is a beginner’s dream.

But what if video isn’t your thing? Writing? There’s Twitter and Substack. Photos? There’s Instagram. Music? There’s Soundcloud and Spotify. Anything else? Patreon. Pick your poison - We live in probably the best time in history for artists to make a living out of their content.

Let me not disillusion you here with the idea that you’re going to make the big bucks from day one. Getting to 1000 subscribers and 4000 hours of watch time on YouTube is a grind. The same holds true for any creative business and unless you love the process, you’re not going to stick with it. So first and foremost, make it fun for yourself.

Providing a service

But if you think that making content is not up your alley, don’t worry! At its core, passive income is about building a machine that provides value to other people on autopilot. With the internet at your disposal, there are hundreds of ways you could do this!

A friend of mine learned how to set up websites and drive traffic and this brings him a few hundred dollars a month. Another person I had on my second channel was making up to $50,000 a month writing e-books on Amazon in his spare time! Dropshipping, renting out warehouses, there are a number of things out there that could be a right fit for you.

A word of warning here though - Making money requires effort and time, and if somebody’s selling you a get rich quick scheme, they’re probably getting rich off of you.

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Conclusion

Making $100 per day isn’t going to happen overnight and, most likely, it’s something that’ll take you years to build up to. But, over time, it’s totally possible, and long term - it’s absolutely worth it.

It’s all about just starting small, figuring out how this works, and getting some results on a small scale - even if it’s making $30 per year from an index fund. Once you start, I promise you, it becomes insanely easier to begin growing the numbers from here. Every win gives you leverage to move on to the next one.

It’s all about compounding your money and compounding your time.

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it” - Albert Einstein

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