Why you NEED to be making money in your sleep

Below is a chart showing the cash flow path of a standard middle class household.

You can see “Earned income” on the left, this is active income from a job. Following the flow we can see all the earned income goes to pay the basic living expenses (home, utilities, insurance, etc) and the rest going into liabilities such as cars and a mortgage.

Now take a look at the following chart showing the cash flow path of wealthy households.

Do you see the difference? The rich send a majority of their earned income to accruing assets such as stocks, bonds, rental properties, and businesses. These assets then produce passive income, this passive source of income is then used to both buy even more assets and cover liabilities.

Take away:

Many middle class households, even if they are high income earners, spend what they make on liabilities and thus are never able to build wealth and cut their dependence on earned income.

The rich build an asset portfolio that eventually can supplement and replace earned income or “active income” with passive income from assets. Then, only when passive income from their assets can fully support it, do the rich splurge on liabilities.

Important note:

A common overarching goal of the wealthy is to use earned income to acquire assets, then use the passive income to replace active income and fund their lifestyle.

This process of course takes time and the practice of delayed gratification. However skipping this vital step and using only active income to fund your lifestyle is the number 1 reason the majority of people will never be wealthy and remain fully dependent on a job.

Some Data:

To illustrate the importance of passive income and wealth creation, here are some statistics to think about.

According to a 2017 GOBankingRates survey:

• 57% of Americans had less than $1,000 in a savings account
• 55% of Americans couldn’t cover six months worth of living expenses

According to the Northwestern Mutual 2018 planning & progress study:

• 21% of Americans have no retirement savings at all

Thoughts:

These are frightening statistics and a situation no family should be put in. The data suggest that most Americans are fully reliant on active income to cover their lifestyle with low to no buffer in case of job losses or economic downturn.

Closing:

Hopefully I have illustrated the importance of developing passive income from assets. To summarize, these are the main advantages of passive income:

• Limited reliance on a job
• Security & peace of mind
• The accumulation of real wealth

The road to financial independence can seem long an daunting in the beginning, however it can be the best investment you ever make for you and your family that will literally pay dividends in the future.