Sailing – something you might consider pursuing when you stop trading your time for money
When it comes to income, a large majority of people trade their time for money. You get x dollars per hour of work, or x salary for a given year. Most jobs requiring sacrificing time for a set amount of money, and it’s unlikely that this is going to change anytime soon.
Nevertheless, there are a number of different ways to stop trading time for money. I outline a few of them below:
Create a product and automate the sales/production/distribution/marketing cycle
Creating a physical product that you can sell and automating the business cycle is something I’ve written about a number of times in the past. This is the entire idea behind Timothy Ferriss’ 4 Hour Work Week. Utilizing the internet and the seemingly endless resources available to entrepreneurs, it’s not unrealistic to produce a unique product and automate the entire business process, from manufacturing to distribution to customer support. If the system is set up correctly, the business owner can be completely removed from the process.
While that is a high level description of his system, there are people who produce things once and receive money years later from their efforts. Authors are the best example of this. When you write a book you can potentially receive revenues for years to come, and ultimately you are not trading your time for money since the book can be replicated without further effort from the author. Authors do not write a separate book for each customer; they write the same book for many customers.
People who create products for mass consumption by consumers have the best chance at not trading their time for money, as well as the added benefit of potentially making enough money to become independently wealthy. Most enjoy creating and therefore do not stop as soon as they reach a certain amount in their bank account but continue to create new products for years to come.
Own a business that runs on auto-drive
While I focused on physical products above, there are service businesses that can be turned into passive income for the owners. Ferriss’ proposes creating a physical product because service companies are more difficult to automate and remove the owner from the actual work.
Let me use tech support as an example. If you started a tech support company, you’d likely start as a one-man shop. Most of your business would be gained due to your personal expertise and customer service. Making the transition to a large enough company that is not dependent on the owner being involved in day-to-day operations, including client retention and gaining new customers, would be much more difficult than a one-and-done product sale where the owner could realistically never have any direct contact with the customer other than a static web page.
With that being said, if you were able to start a service business that grew significantly and had the right people in charge of management and business development, you could essentially have the company running without your input. Businesses, whether they are a service- or product-oriented, definitely has potential to allow the owner to utilize other people who are willing to trade their time for money to ultimately free them of trading their time for income.
Dividend income from stocks
Dividend income is often presented as a great income source for retirees. Once people have reached retirement, they usually have a large cash reserve. Investing in stocks that provide dividend income can provide a monthly cash flow for retirees through fully leveraging their savings.
Let’s say you own shares in Verizon.
Their .52 quarterly dividend translates to 2.08 per year per share of dividend income.
If you own 24,040 shares of Verizon, you would receive approximately $50,000 per year in dividend income.
At a price of 51.39 per share, you would need to invest $1,235,415 in Verizon to get this type of income off of dividends.
If you were able to acquire a large enough asset base in your life to the point where you can live off of dividend income, you could potentially free up all of your time to pursue whatever you want. This could be work, hobbies, or pretty much anything you want to pursue.
As with anything, dividend income comes with some risk. The stock price could decrease over time, resulting in a loss of equity. The company may change their dividend policy, resulting in a decrease in cash flow and required re-allocation of your stock ownership. If you have the money, though, living off of dividends can be a great option to stop trading your time for income. The large amount of money you need to invest to make this work makes it impractical for people early in their career, but is a great long-term goal for passive income.
____________
Is your ultimate goal to stop trading your time for income? What is your plan on accomplishing this?
____________
Photo by Mike Baird
Check out some of our favorite personal finance resources:
Are you getting the best credit card rewards? Check out the top cash back credit card offers (updated daily)
Make extra money: 15 ways to make money from your computer
Get the First Chapter Free!
Join our online community and get the first chapter of the book Student Loan Solution absolutely FREE!
My ultimate goal is similar. However, I would like to find work that I find so enjoyable that to me it is not a simple trade of tim for money. The goal is for it to be the place I want to be and the salary is just a bonus. Plus, I wont be susceptible to the whims of the market.
The Student Loan Sherpa I would also like to do work that is so enjoyable that it is not a trade of time for money. I think having passive income opens you up to the opportunity to pursue what you want.
This would be our ultimate goal as well. (I love the 4-Hour Workweek as well.) When we first started the blog, we thought this would be a great way to earn passive income…yeah, it isn’t so passive:)
GregatClubThrifty That book is so awesome! Blogging COULD potentially be a passive income source, just like a rental house that you own but is managed by someone else could be a passive income source, but owning a rental property isn’t intrinsically passive.
Obviously passive income would be ideal, but honestly I’d probably also be happy with non-passive income as long as I was doing work that was meaningful and enjoyable and preferably working for myself.
StudentDebtSurvivorI think having some passive income opens you up to be able to take opportunities to do things you love (since there is always risk involved if we are talking self-employment or solo projects). But I definitely agree with you on this one – everyone’s goal should be to do work that they enjoy.
I would certainly like to remove at least some of the need for working. Developing passive businesses would be a great way to do that, although I think it can be really difficult. Possible but difficult. I also view our investments as an opportunity to provide income, but I don’t focus specifically on dividends. Income is income whether from dividends, interest or capital gains, so I don’t see the need to limit yourself. But whatever your approach, investing is certainly a really powerful tool in building a lifestyle that relies less on earning power.
Matt @ Mom and Dad MoneyIt certainly is difficult! It’s something you need to work at, and accumulating income-producing assets is difficult as well. You need to first of all get out of debt so you can start putting your cash flow towards it, and you need a significant amount to really make it possible to live off of dividend income (I think my example showed that pretty clearly). All and all, though, it seems to be the right direction to be headed towards.
I am with KK on this. Passive income would obviously be the ultimate, but really I just want to be doing something that is meaningful, that challenge me and allows me to give back to the community.
FrugalRulesMeaningful work isn’t always easy to come by, surprisingly.
I would love to have a high level of passive income. Then in turn do work that I love.
SenseofCentsI should have just written that for my blog post! That essentially sums up my goal.
Passive income would sure be nice. I feel the best ways are dividend stocks and real estate.
OneSmartDollar
I would have to agree.While it may take a while to get to a point where you have enough money
in assets that the income is enough to live off of, I think pursuing those
income-producing assets is a great first step towards passive income.
I once heard someone describe passive income as MWIS…Money While I Sleep. In other words, you’ve have created a product that generates income as you are dreaming away at 3:00 am. I liked the sound of that!
Luke_1428 I like the sound of that as well!
I’ve been reading Rich Dad Poor Dad and this post is perfectly aligned with everything in the book. I know I’ll focus on investing for the passive income but switch over to a more fulfilling career/starting my own business and be able to not worry about a pay check.
BrokeMillennial Great minds think alike ;)
My favorite business is income property which has its shortcomings, but can be very lucrative.
krantcents1 We rent out part of our house and it definitely has it’s challenges, but overall I would agree that owning income-generating property can be incredibly lucrative, especially as a long-term investment. Not only can you most likely take some profit off the top each month for income, but in the end you own the place and have an asset you can sell or simply enjoy the income each month!
I read that book a few years ago. Very interesting. Publishing a book is definitely a passive source of income. Most likely why so many people are creating eBooks and selling them online these days as well. What I find interesting are the people that are able to put a good eBook together in a week and sell it like hot cakes, simply because they knew exactly what people were looking for.
TacklingOurDebt I wish I could meet and talk to some of the people who have been able to put together an e-book in a week and sell a bunch. Would be a fun case study and may even reveal enough to mimic them.
This article brings up a great point. How awesome would it be to be getting paid to do nothing? That’s should be the end goal for everyone. The problem for most people is that you normally need to trade a lot of your time for very little money at the beginning. It can take quite a while to get to this point, but once you do you’ll be glad you spent all of that time.
CommonCentsWealth I don’t know if getting paid to “do nothing” should be the end goal for everyone, but having passive income streams does open up opportunities to pursue other work and life opportunities you otherwise would nto be able to.
I’m working on 2/3 of those things right now. The only one i’m not working on is creating a product to sell, but maybe I’ll do that in the future. I would love to get to the point where my side income from more passive endeavors replaced my income from my main 40-hour per week job.
ayoungpro We have similar goals ;)
Love this post! I esp would love to ramp up my stocks! I could def. live of 50k a year! :)
BudgetBlonde Thanks Cat, I appreciate it! I could easily live off 50k a year as well. It would be incredibly difficult to get there since you need such a sizable amount of money in dividend-producing stocks, but I think that long-term it’s a great goal.
Even though it isn’t really passive, real estate is our ticket I believe. I would live to sell something or invent something, but I don’t think I’m that creative.
Eyesonthedollar Real estate is a great option, and I’m sure you are very happy with your rental property! Our studio has had it’s challenges, but I’d say it’s more so that it’s part of our house. If we had more money to invest I would seriously consider buying a rental property.
I would trust more stocks with decades of historical data or even better real estate than online businesses which are pretty new. They are cheap to set up so giving it a try is easy but I wouldn’t rely on e-income as a 50 year plan.
RFIndependence Stocks would be the ideal, for sure. I think you have to start somewhere, though, so making income online with the plan of diversifying to solid dividend stocks or rental properties is a great plan.
We’re aiming for passive income from stock. I am not opposed to owning a business, but this is something I might explore after financial independence.