I have read a ton of articles and listened to hundreds of podcasts on passive income and financial independence. As anything in life you will easily find out that the unique knowledge in all those sources is just a couple of things. Of course people need to fill the time and the gap with words and words. Some readers would need more words in order to start believing that change is possible and so on and so forth.

As I promised into the beginning of this blog, I will keep everything (or most of it) to the point and will not waste your time reading my writings.

In a nutshell the path of passive income and financial independence (FI) is the following:

Reasoning: if you work for a paycheck you are always trading time for money then you only have 24 hours a day which means there is a hard limit of what and how much you can achieve. The minutes you are not working, you are not making money i.e. you are losing money. If you want FI you have to “make money while you sleep” – see the mantra above.

Once you understand the mantra and you have the will to go for it there are 3 basic things to follow

Spend less than you earn! That’s crucial! If you spend more than you essentially earn there is no way to invest anything and on the contrary you are already collecting debt and you are on the opposite side of the compounding effect i.e. it works not for you but against you (it works for your bank). So, the very first step is to figure out how to live below your means. Would it be to cut additional expenses like online subscriptions, club memberships, too expensive travels, too expensive cars, too expensive houses, etc. You can look for other opportunities for additional income streams as well. You have to figure out the best way for you.

You pay yourself first. Once you live below your means you can start saving and investing. That means you have to define a monthly amount of money you will be investing every month. And once you get your paycheck you’d better (automatically) move that money to your investment account. Think of this as the government would increase the taxes  (let’s say with 10%) and you anyway have to start paying that money. Best way would be to set a percentage of your salary and keep that ratio. If you can’t start with more than 10% then go with 10% and see if you could increase that further. If you can afford only 5% then do so i.e. better start with very small amounts than never start! I have started with 20% and was increasing it year over year, and now I put up 45% from my income from the beginning of 2020. I also invest about 60% of my annual bonuses.
Split the investment money to investment buckets. Each investment has 2 components – risk and return. Those both are very tight connected together i.e. the higher the return the higher the risk. That means that if nowadays you invest into something which promises 5+% return you have to think twice if the associated risk is worth it. The stocks are returning about 7% in average for the last many years, however, during bear markets the stocks could go down with 50+% and stay there for quite a while. Many might never recover. So, you have to be ready to accept that risk and stay invested even if the market times are not looking good. More on how I manage my investment buckets you can read here.

Now, start investing. It is the most vital part of the financial independence path. And the question is where to invest? There are plenty of opportunities – Savings Accounts, Certificates of Deposit, bonds, stocks (including mutual funds, index funds, ETFs), peer-to-peer lending, real estate, startups, and many more. If you have done all of the above and you do steps 2-4 monthly then you have to make sure you are up to date with news on economy, markets, certain companies you’ve invested in, and watch for new investment opportunities. For staying up to date I use, I’ve subscribed to google alerts (on keywords) and I have developed my own keyword search over known news data sources.

Regularly, once or twice per year, you have to rebalance your portfolio i.e. check the real investments in your portfolio i.e. you check the real split of investments among the buckets from step [3] above, if that matches the initial distribution you defined. And if not, then sell out the high fliers and buy into the rest, so you achieve the initial split ratio among the investment buckets. As no one can time the market, so rebalancing the investments is sort of “selling high and buying low” on the market
The above recipe is more or less the same you will read at multiple places across the web. There is not more secret sauce than that! What’s left is your decision to walk that path. Your discipline to keep walking (especially to follow your plan of investments) even if market conditions are no longer ideal. And last but not least, to evaluate your approach regularly and adapt accordingly (in case of new opportunities are showing off or discontinue some investments).

Of course, if you choose to invest into peer-to-peer landing market you have to research the available platforms, understand how they work and come up with your own strategy. If you will invest into stocks then you read and learn how to evaluate companies and invest into the under-valued ones and so on. But all that could come at the second after you have done 1-3 from the list above. Once you have money for investment you can initially just put them into a higher yield savings account or buy a certificate of deposit and then keep on learning about other investment opportunities.

In order to be successful, as with everything else in this world, you need to keep investing no matter what. If you experience negative impact from your investments then stop for a while, evaluate and continue again as the mantra above is still valid:

The only way to financial independence is becoming an investor i.e. investing and benefiting from the compound effect over time!

Good luck on your way to FI!


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