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Finding Passive/Alternative Income Streams
Even though this site is all about my million dollar net worth journey, I personally consider passive/alternative income to be more important. Why? As I've mentioned before, I would consider myself financially free the day that I no longer need my 9-5 job to cover our expenses. Imagine the day that you don't "need" to work to pay the bills. That, my friends, is what I think wealth accumulation is all about.
Now some people really love their jobs and wouldn't consider leaving until they're old and can't do it anymore. More power to them as they are truly lucky to have found their passion.
Me? I "like" my job but it's not my life calling. If I had enough in alternative income streams to comfortably support my family, I would seriously consider dropping my career and pursue my passions full time.
What are some ways of obtaining passive/alternative income?
Dividends
I'm a big fan of strong dividend paying companies (like the ones listed in the Claymore ETF). These companies have a consistent track record of paying and increasing their dividends over the years. Not only do I like the annual raises, I really like that dividends are taxed favorably.
The only issue with this method of alternative income is that you need big capital (or time) to get enough in dividends to make it worth while. For example, if you average a 3% dividend in your portfolio, in order to get $10,000 / yr in dividend payments, you would need a $333,333 portfolio.
Of course the beauty of strong dividend paying companies is that they are known to increase their payments at least once a year. Increased dividend payouts from these companies usually result in higher stock prices. Providing that you start investing in dividends early, then with time, the dividends will become increasingly more significant.
Don't have a lot of cash to invest at once? Look into SPP and DRIPs that companies like BNS and ENB offer. That will enable you to purchase as little as one stock at a time with the dividends reinvested in partial shares.
Rentals
This is another income stream that can really pay off and give you great return for your invested money (b/c of leverage) if you do it right. Owning rentals is not really passive unless you hire a property manager.
What I like about rentals is that you get monthly cash flow (hopefully) along with capital appreciation. In addition to this, there are huge tax write offs. The real down side of this is dealing with tenants which can be a job in itself. If the cash flow allows, hiring a property manager can really reduce the workload.
Side Business
Another way to increase your alternative income is to do something that you are passionate about. No matter what you are passionate about, there is usually a business opportunity somewhere. Whether it's photography, a specific sport, yoga, cooking, writing or creating websites, do what you love and you'll be surprised at how money will follow passion.
It's pretty clear that I'm passionate about money. Whether it's talking, blogging, saving or investing it, I really enjoy it. There's no way that I could keep up on the posting schedule on MDJ if I didn't enjoy it so much.
Final Thoughts
As the story goes, there are 3 ways to increase your savings:
- Spend Less than You Earn
- Make More Money
- Do Both
I'm partial to option number 3.
So ask yourself, what are you passionate about?
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33 Comments, Comment or Ping
1. Traciatim
What happens when you don’t know what your passion is? I can’t seem to figure it out. It would seem that every time I try to get in to something I just get bored.
Keep in mind that if you have kids that eligible dividends may decrease things like your ‘baby bonus’.
For instance, say you have 2 kids and 30K in strictly eligible dividend income. Your line 236 on your income tax will actually say (30K * 1.45) = 43.5K. Your CCTB payment in my province would be 351.25 on 30K per month, and only $192.76 at 43.5K. At least that is, if I’m calculating things correctly. I didn’t really have time this morning to look at the T1 forms closely. So there is more to think about than just the taxes and the income.
Jan 23rd, 2008 @ 8:43 am
2. FrugalTrader
Traciatim,
That’s a great point. It took me a REALLY long time to figure out that I really liked money. I always knew that I had an interest in it, but I always thought that money was just “part of life” and that everyone felt the same way as I do. Perhaps this is a question you can consider, what would you do on a day to day basis if you had all the money you would ever need? That is, after you’ve got the vacations, cars, lazying in front of the TV out of the way?
In terms of CCTB, yes you are right. Additional income will reduce your government benefits. In that case, like OAS, I would consider the reduction in CCTB to be a tax on the additional income. So I guess you would have to weigh out the pros and cons between the extra income and taxes.
Personally, I would rather focus on increasing my own income streams than worrying about a reduction of government benefits.
Jan 23rd, 2008 @ 9:03 am
3. Canadian Capitalist
If you can’t be bothered with being a landlord, REITs are an attractive alternative.
Jan 23rd, 2008 @ 12:01 pm
4. mike
actually, passive income at an early age is a bad IDEa. Income tax is a wealth destroyer. If you have the benefit of a long horizon you should invest in high risk vehicles that only get taxed when you cash in.
Jan 23rd, 2008 @ 12:05 pm
5. Peter @ Plan Your Escape
CC, yes, I like the REIT route as well. It allows you to have income producing real estate without the requirement of a big down payment or the hassle of managing your own property. REITs by nature also provide a nice level of diversification within the real estate market. Investing in REITs also allows you to gradually increase your holding instead of having to save up to make a big purchase of another property.
And as an added bonus there are some attractively priced REITs out there right now.
Peter
Jan 23rd, 2008 @ 12:15 pm
6. FrugalTrader
Mike, I would rather be a guy making $100k and taxed at 50% than someone making $50k and taxed less @ 40%. On top of that, most of the passive income streams that I mentioned above ARE tax efficient. In BC, you can make up to 75k in regular income and grossed up dividends combined and be taxed 0% on the dividends received. Rental income, landlords usually have a lot of tax deductible expenses which reduce taxable rental income significantly.
CC, yes you are right, reits are a good alternative to owning hard real estate assets. It really depends on what you’re comfortable with. Which REITs look attractive to you right now? I’m liking REI.UN.
Jan 23rd, 2008 @ 12:30 pm
7. nobleea
“Another way to increase your alternative income is to do something that you are passionate about.”
If you’re passionate about the job you already have, does that mean you don’t have to work anymore?
Jan 23rd, 2008 @ 12:39 pm
8. FrugalTrader
Hey Nob, if you have a job that you are passionate about then I wouldn’t consider it work at all. It’s just day to day “fun”.
Jan 23rd, 2008 @ 12:50 pm
9. ThickenMyWallet
I have had the pleasure of meeting several people who could live off of their passive income. What I always found curious is how bored they all were- so they ended up starting a business to occupy their time!
It is funny to me because we all work so hard to build up passive income streams and then what happens to the people who have it? They go make “active” income!
Jan 23rd, 2008 @ 12:56 pm
10. Warren
I enjoy the idea of passive income, and I’m working towards it, with a decent passive cashflow now.
Ideally I’d love to retire in 10 years (I’m 30), but what I’d rather do in the meantime is drop down to part time. Unfortunately in any sort of “professional” career this is difficult to do, unless I go out and try some sort of consulting, but that is more risk than I care to take on right now. Is anybody else in this boat? It seems like good jobs are “all or nothing”.
Jan 23rd, 2008 @ 1:15 pm
11. nobleea
Nurses can make a decent living working part time. Most other professionals will have to be very specialized contractors to make a good salary while working part time.
Jan 23rd, 2008 @ 3:58 pm
12. Rod Payne
“What I like about rentals is that you get monthly cash flow (hopefully) …. In addition to this, there are huge tax write offs.”
These two are mutually exclusive. If you have strong positive cashflow, then by definition, your income far exceeds your outgo. You then have taxable income. If you have huge tax writeoffs, it’s because of expenses, which reduce your cash flow. It’s a catch-22.
Just wanted to clarify that.
Rod
Jan 23rd, 2008 @ 4:15 pm
13. FrugalTrader
Rod, yes that is true to a certain extent. However, when you obtain a couple properties you can claim your home office and supplies along with a portion of your car used for business. Those extra write offs can be significant without affecting your net income.
Jan 23rd, 2008 @ 4:33 pm
14. Dave
I was thinking the same thing as Rob. Then only time you should be happy about the huge tax write-offs is when they are significant, which is when expenses are high, meaning net income is low (in which case you shouldn’t be happy at all).
In the example you linked to, you “only” paid $800 in tax thanks to the deductibility of the $8000 in expenses. But in the end you only made $2000 gross, $1200 net because of your $8000 in expenses. If your expenses were reduced to $7000, the tax write-offs would be less (oh no!) but your net income would be more so that’s better.
More expenses means less net income. When people hype the benefits of tax write-offs it’s as if they are saying “more expenses are better.” More expenses are never better.
Jan 23rd, 2008 @ 4:36 pm
15. Rod Payne
Don’t forget, also that mortgage principal reduction is not tax deductible. This also impacts the cash flow vs write-off issues. I’m always amazed at the number of people who think they can write off the entire payment.
Jan 23rd, 2008 @ 4:42 pm
16. TheWalrus
Great article. I am partial to real estate. You invest with OPM (other peoples money!) and make cash in two ways: appreciation, and hopefully a monthly profit. Over time an asset is paid off that costs hundreds of thousands, on average, and you have an income stream coming in that can replace earned income. The lucky ones get property managers to deal with the tenants.
The only passive income that is really “hands off” is dividends on investing and royalty payments. Most sites need to be maintained much like a rental property.
The most important thing is passion. I like money and real estate, so this makes sense to me. Don’t go looking for passive income, go looking for “what you love” and hope you can generate passive income from that.
TheWalrus
http://www.thewalrus.biz
Jan 23rd, 2008 @ 10:06 pm
17. Norm
Great website.
Passive Income is definitely is the most power thing about investing. Something that makes you money when you are sleeping, playing and working.
Whether it will provide freedom in the future, for me it is more in terms of security, not have to have a job holding you victim to your life.
I am also partial to property as that is my greatest experiences in terms of wealth growth but I dont think it really matters, it really depends what you enjoy and feel comfortable with. It maybe good for us but not good for you.
Jan 23rd, 2008 @ 10:30 pm
18. CanadianImmigrant
Hey FT, as the tax season is coming, having a blog is like having a business, specially because of the time involved, use of internet, computer, fax, printer, buying magazines, etc.
I was wondering if you can use MDJ as your company and having said that, what can we deduct when filing our income taxes?
Thanks!
Jan 24th, 2008 @ 4:07 pm
19. FrugalTrader
CanadianImmigrant,
Yes there are a few tax deductions that you could use for your blog business. Check out this article:
http://www.milliondollarjourney.com/tax-tips-your-blog-as-a-business.htm
Jan 24th, 2008 @ 4:18 pm
20. CanadianImmigrant
Thank you very much!
Jan 24th, 2008 @ 4:33 pm
23. Alex Liu
This is a great post. I prefer side business and property investment as my passive income.
I focus on blog and invest what I earn from my blog to invest some property. I found myself doing this way will be faster and easier.
Alex Liu
How To Become A Millionaire
http://secretsofunlimitedwealth.com
Jan 27th, 2008 @ 7:35 am
25. klein
All this talk about finding your passion and that it will be nothing but fun all day that you get paid for is CRAP.
My passion is performing. Now, let’s assume that I had a steady performing gig like a sitcom, soap, or Broadway musical going on. It would be fun, yes, but there is a hell of a lot of hard work that goes on too, and there’s quite a bit of it that is not enjoyable.
People seeking their passion should remember that even once you’ve found it, there are going to be some aspects that you don’t love as much as others. The key is to find something you love for which you are willing to go through the crappy parts.
Jan 29th, 2008 @ 4:05 pm
26. ETF Income
I just love the idea of passive income. I especially favour Dividend ETF as it takes away the risk of specific company.
http://etfincome.blogspot.com
Jan 31st, 2008 @ 2:13 pm
27. Dividendgrowth
After reading FrugalTrader’s post, and going through the comments, it seems that the only truly passive income stream that could exist in todays world is investing in dividend paying stocks. The only think that you need to do is buy a basket of stocks that have a history of increasing their dividends, reinvest the dividends automatically and come back in 15-20 years to collect the fortune. The only risk though is that not all of the dividend achievers of 2008, will be considered dividend achievers in 2028. However, there are certain dividend ETF’s like SDY, which would automatically invest your funds in the latest dividend achievers. Even if you buy several ETFS like EEM, SPY, IWM, VEU you can safely go to sleep and return in 20 years.
Feb 1st, 2008 @ 4:35 pm
28. TheWalrus
Real estate is certainly passive income, if you have a property manager that is. The idea of passive income isn’t that you never have to work for the reoccurring income. Asset management is essential. The idea is that it takes one large or consistent effort to establish something that produces income in perpetuity.
Feb 2nd, 2008 @ 12:29 am
29. George
What’s your take regarding investing in the Claymore Dividend ETF instead of individual companies? The relatively low MER would seem to make it a good way to diversify your holdings while still receiving regular dividend income.
Feb 6th, 2008 @ 2:04 am
30. Dividendgrowth
George,
Which of the particular Claymore Dividend Etf’s are you referring to? I do not mind buying dividend etfs that only consist of companies which have a solid history of raising them for at least 20 years. The ETF should also try to increase its dividends every quarter or at least year over year. The issue with dividend ETF’s is that it might give a bigger weighting to a stock which might increase its dividend the most or even cut it, and you will actually receive less income. I like having my own list ready, since I can weight my stocks equally..
TheWalrus - I think that if you hire a manager real-estate should be considered passive income. If you deal with the day to day stuff then its a job..
Feb 7th, 2008 @ 6:45 pm
31. George
DividendGrowth: I’m looking at CDZ, the Canadian Dividend Achievers ETF, primarily to be used as part of my non-registered portfolio. I like the idea of getting a basket of stocks that will generate tax-favourable income. That said, I may decide to invest in individual stocks as well.
Feb 7th, 2008 @ 7:27 pm
32. Tim
Owning rental property is a tough business, even with a property manager. I’ve found that tenants lie, cheat, and steal, and managing them is like dealing with children. I’ve also found that some property managers lie, cheat, and steal. Rental property is a game of constantly managing people, and keeping aware of situations that surround the area your property is in. It surely is not passive income…On top of the dealing with people aspect, there’s a ton of paperwork, especially in some cities with strict code enforcement of rental properties. Fixing up the rental properties was the fun and easy part of it..the rest of it is all a pain in the butt. Just think how much it sucks when you have all the copper pipes stolen out of your property…Property Manager or not, this becomes a huge expense.
Check out some of our thoughts on rental property at The Money Kings
Feb 12th, 2008 @ 9:31 am
33. Dividendgrowth
I would be interested to see how much your “passive/alternative income” has reached since your last update in September 2007.
Mar 31st, 2008 @ 3:33 pm
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