For me the definition of Rich is not only to have lot of money. Rich people make money differently. For them, ‘how’ they make money is very important.
For ultra rich people, money keeps dripping in their pockets irrespective of whether they work for it or not. These people have source of income, which are not like we common people.
For typical common men, there are three common sources of incomes. Please see below the graphical representation of these sources of incomes.
You can see that how the income from job (89%) dominates the other sources of income. The biggest problem of job is that it makes you complacent.
Actually making money from job is so easy that we compromise our independence for it.
But for people who like to get rich, and lead a financially independent life, they must increase their income from other sources.
The best source of income for financial independence is passive income (income from investment).
You can see in the below graphical representation that, when income from job is in tune of 89%, passive income is close to only 3%. I know about people whose passive income is even Zero. These people can never afford to become rich.
In order to become rich, one must have multiple source of income. Income from one source can never make one rich. But God has given us only one mind and finite hands and legs. How one can work for multiple income sources?
This is a very valid question. We can only multitask till a limit. In order to become rich, we must put our moneymaking into autopilot.
This is where the concept of “Passive Income” becomes very important. Invest your money wisely, and your income will start to build passively. The bigger will be the investment portfolio, the larger will be the ‘passive income’.
If one has to get any closer to becoming rich, the first milestone is to realize the importance of financial independence. Increase the percentage of passive income (like in example) from 3% to 40% at least.
Initially it may look like an impossible task, but start slow. Start investing money for the purpose of generating passive income. Re-invest your passive income and make the investment portfolio bigger everyday.
Income from hobby
It is true that income from investment is built slowly. This is where the third source of income comes in very handy. I call it “income from hobby”.
Though income from hobby is not as effective (in building financial independence), but it is far more effective than income from job.
In fact income generated from ones hobby is a great compromise between doing a job and leading a completely financially free life.
Income from hobby is also a very rare phenomenon. Only tiny minority in this world can claim that they can generate sufficient income from practicing their hobby.
Research says that less than 1% of people is fortunate enough to tap their hobby and even less can start generating income from it.
This form of income cannot be termed as passive income, as you need to work to let the money flowing-in. But working on your hobby is very effortless. One can work on their hobby for 24 hours without getting tired. As we have inherent love for our hobbies, the work done is very effortless.
The moment your income from hobby is close to 10%, you can be confident that in next 3 years it will touch the levels of 25%. This is the power of income from hobby and income from investments. They fuel themselves. Their growth compounds at a dramatic pace with passage of time.
Income of rich – passive income
In this article I will talk more about income from investment. Our ultimate aim is to increase this source of income to such magnitudes that income from job start looking unimportant.
In such a situation we will not be slaves to our job. Instead we will start treating our job as a option. If we like our job we will continue, or we are free to look for an alternative. This is true independence.
Following ones hobby and building passive income sources will make one to continuously drift towards freedom. The person will continue to drift towards ones comfort zones without having to compromise the requirement of money in life.
So lets see, which investment sources can give us complete financial independence by generating passive incomes.
My personal favorites are four. I am listing them in order of increasing priority and difficulty. The rating are given in scale of 1 to 5. Five is best and 1 is least.
|Investment Option||Surety of Income||Income Yield|
|(1) Interest income from Bank Deposits||5/5||2/5|
|(2) Dividend income from Stocks||3/5||3/5|
|(3) Rental income from real estate property||4/5||4/5|
|(4) Capital Appreciation from Stocks, Real Estate, Precious Metals, Arts etc||2/5||5/5|
So as an investor, we have these milestones set for us. Every time we invest, we must know that ‘why we are investing’.
The answer to the question shall be as clear and specific like this, ‘I am buying this stock with purpose of generating annual dividend income @ 3%’.
Some answers can also be like this, ‘I am buying these stocks/gold with objective of selling them after 5 years, or when their value double, which ever is earlier. This appreciated capital I will use to buy more of high dividend paying stocks’.
Our focus should be one. Invest money to generate additional source of income. These income sources will ultimately make us financially independent.
Suppose you are buying a stock. If you know how this stock purchase is helping you to reach your goal, you are more likely to take a more reliable investment decision.
Note: Capital Appreciation is one sure sort way of becoming really rich. But it is not easy to duplicate the profits again and again.
This is the reason why, in the factor of surety of income, it earned only 2/5. This is one source of income that not many rich people are found of.
Rich people keep investing their money quite frequently. Capital appreciation does not offer opportunities as quickly. Hence, rich people divert their money in other sources.
Their favorite is rental income. Real estate property is favorite of rich people. But don’t we common men also buy read estate property? Yes we buy, but rich people do it differently.
Real estate property is a very capital-intensive investment. Hence common people invariably resort to bank loans to buy a property. But rich people do not take loans. Bank loans lower the yield of property investment.
So if one really wants to become rich, posing as rich people and buying multiple real estate properties will not help. Trick is to try buying property without bank loans.
Do not pose as rich, become rich
This is another point that I would like to post in this blog. Many people never become rich because they keep posing like rich without actually being rich. How many people we know around us who spends fortunes on vacations? How many people we know buy homes for self that they do not actually afford? How many people live a lavish lifestyle with not even 5% income going in savings/investment?
What factor decides if one is really rich, or is only posing to be rich?
If one is earning only from job, then the person is not rich. No matter how big is the paycheck, if the passive income component is negligible, the person is not rich.
In order to get rich, one must channel ones income from job towards investment. The types of investments that shall be bought shall ensure the above four types of income.
People who are really wealthy are different people than you and me. Income from job cannot make us rich. That is why we are different from rich people. Rich people are not dependent on their paycheck from job.
Income of rich people is shown below. While income of common men are also shown.
|Income from Wealth||Income from Job|
|(1) Interest income||(1) Salary & Perks|
|(2) Dividends||(2) Bonus|
|(3) Rental income||(3) Increment of Salary|
|(4) Capital Appreciation|
The difference between income from wealth and job is clearly evident from the above table. Income from job asks you to invest 12 hours each day to let is flowing in.
But income from wealth you accumulate (like deposits, stocks, property, gold, arts etc) income will automatically drip-in no matter if you are working on it or not.
This is the reason why such incomes are called as passive income. Your real estate property will continue to appreciate in value at its own pace and it does not require your intervention.