I retired from my engineering career when I was 38. How is that possible? The answer is passive income. Well, it’s a bit more complicated than that. When I stop working full-time 7 years ago, we didn’t have enough passive income to pay the bill. My wife continued to work and I make some income from blogging. (Mrs. RB40 plans to retire in 2020.) Our net worth was 30x our expense, but it didn’t throw off much passive income. In theory, I could sell our investment to pay the bills. However, I don’t like that. I’d rather have passive income instead. It took many years, but our FI ratio finally surpasses 100%. This means we don’t have to work anymore. Our passive income is enough to cover all our expenses!
*FI ratio = passive income / expense
But how did I get started? Passive income takes a long time to build up. We saved and invested for 23 years to achieve financial freedom. Some people took less time and some people more. Here is how we did it.
Start Making Passive Income
1. Spend less than you make
Spend less than you make and save 50% of your income. Everyone has to start somewhere. If you have to start from $0 like me, then you need to work hard and make some money first. My wife and I are both frugal so we saved a good percentage of our paychecks right from the beginning. Most of the savings went to max out our 401k contributions, but we have a little extra left for our savings account too. The savings account generated some income from interest. It was very small, but this is the first passive income for almost everyone. You need to walk before you can run.
2. Invest in the stock market
Once we have a sizeable amount in our savings account, we branched out to investing in the stock market. At first, I invested in mutual funds and growth stocks. But that’s not the right style for me anymore. Once I retired, I gradually moved our investment to dividend stocks. This works very well because it’s a less stressful way to invest. I could focus on buying quality companies and don’t have to worry about selling very often. The dividend is also a great source of passive income.
The key for us was to keep investing through the down cycles. When I was working, I had good income and was able to keep adding to our investment through the Financial Crisis. This gave our portfolio a huge boost and it’s paying off now. If you have a steady income, you need to keep investing through thick and thin. The market is very volatile now, but don’t be afraid. Keep investing and it will pay off later.
For new investors, I suggest investing in a low-cost index fund like VTSMX (Vanguard Total Market Index Fund.) Just keep adding to this fund every month while learning how to invest in individual stocks. Once you’re more comfortable, you can start investing in individual stocks. Once you’re near early retirement, then you can gradually convert your portfolio to dividend stocks as I did.
We purchased a house in 2000 and lived there until 2007. When we moved, we rented the house instead of selling it. I think many landlords started out this way. The rental home worked out well for us so that gave us the incentive to acquire a 4-plex. These early properties gave us some rental income and we made some money from appreciation too.
Unfortunately, I can’t be a landlord anymore. My mom has dementia and I need to spend more time in Thailand to help out. When I’m there, I can’t manage our properties. (I haven’t been able to find a good property manager. They are way too expensive anyway.) That’s why we’re consolidating our properties this year. We moved into our duplex and put the rest up for sale. Now, we only have one rental unit left. Being a landlord is a great way to build wealth if you can handle it. However, there are alternative ways to invest in real estate.
4. Real Estate Crowdfunding
I can’t be an active landlord anymore, but I still believe in real estate. That’s why I’m investing in REIT and real estate crowdfunding. Currently, we have about $100,000 invested in REIT and $55,000 in RE crowdfunding. Our condo just sold so we have some cash to invest now. I plan to increase our investment with CrowdStreet and that income should replace our rental income. I think this is a great way to invest. CrowdStreet has commercial projects across the USA. You could invest in apartments, self-storage, strip malls, office buildings, and more. It’s too expensive to invest in real estate locally now. I intend to focus on America’s heartland, where real estate still has a lot of upsides.
*Sign up for free with CrowdStreet to browse their projects. It’s a great way to diversify your investment. The stock market is great, but I don’t think it will do well over the next few years. The global economy is slowing down and the stock market will be very volatile.
5. Side Hustle
Blogging is my main side hustle. Okay, this one is not quite passive. I spend 20-30 hours per week on Retire by 40. Blogging can be a lot of work, but it can lead to huge opportunities down the road. Many bloggers left their day job to pursue self-employment and they are doing quite well. Some elite bloggers are making a lot more income than they ever made working for a corporation.
I encourage everyone to start a blog. The great thing about blogging is that you don’t need to know how to do all the technical stuff. You don’t even need to be a great writer. I was way better at STEM subjects when I was in school and I never thought I could write like this. My early articles weren’t great, but I improved little by little. Like anything, the more you practice, the better you get. Seriously, if I can write a blog, anyone can.
Here is my tutorial on How to Start a Blog and Why You Should. This one isn’t passive income, but it’s a very good bridge. It took time to build passive income. The blogging income gave me extra time to get here.
Start making passive income
So you see, it’s not difficult to start your passive income rolling, but it can take a lot of time. We started small with just a few dollars in passive income. Now, our passive income is enough to cover our expense. That’s true financial freedom. It took us over 20 years, though. If you’re lucky, you’ll get there sooner. My main advice is to try different things and see what works for you. If you’re good at managing a rental property, then focus on that. Good luck!
Readers, do you have any plan to make passive income? You can see how I’m doing at my Passive Income page.
Source: Retire By 40
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