Some people are born with money, they come from families with wealth and grow up seeing how wealth is managed, passed on from generation to generation, etc. Others on the other hand are born middle class (like me, and probably you too) and aren’t educated on how to deal with money that much. If this second group of people wants to join the first they need to develop the habits of rich people as they start becoming rich, something which can be much more difficult than it sounds…
Have you ever heard about a kid (actually kids are usually smarter, think more of a middle age guy) who sold his internet company a few months after launching and went out to buy a mansion and a Lamborghini and now, only two years later is completely broke? That’s the perfect example of someone who wasn’t born rich, became rich (and deserves all the merit for that) but was unable to develop the right habits towards his wealth.
The same thing happens with passive income. If you want to live out of your passive income portfolio you need to treat your passive income revenue with care. This might sound obvious, but in reality it turns out many people are unable to properly manage their passive income to the point where it becomes more of a burden than a blessing.
There is no such thing as free money
I’ve seen a lot of people who got into the passive income world make the same mistake over and over. Most people have been educated to believe you need to work to earn money, or in other words that you are paid by the amount of time you work. People who believe that to be true tend to think of passive income as “free money” and therefore they don’t value it as much as the money they’ve earned from their clock-measured-work.
Someone with this mindset will do things like book a more expensive hotel if they are paying with their passive income money than if they are paying with their regular salary, or simply go buy gadgets and other stuff they wouldn’t have bought otherwise. The way they justify this is by saying things like “My passive income money is like a bonus I wasn’t counting on getting” or “Since I’m not counting my passive income in my yearly earnings I can spend it on anything I like without compromising my finances”.
People who think this way will never be able to become financially independent… If you’ve ever thought like that let me tell you a couple of things that will hopefully help you change your mind.
There is no such thing as free money! The fact that you are not exchanging time for money doesn’t mean you haven’t earned that money. The fact that you’ve made money while you were sleeping doesn’t mean you haven’t earned that money. Any money that you make with your passive income portfolio is money you’ve worked for, you’ve earned it and you deserve it!
If you want to achieve financial freedom by building your portfolio of passive income revenue streams you better start getting your head around this, because until you start seeing your passive income revenue as hard earned money you won’t start treating it with the care it deserves. And trust me, money like being taken care off.
So how do you start? How do you break your old habits and start building new ones? Were here are a couple of ideas you can start with depending on how much passive income revenue you are generating right now.
When you start earning pocket money from your passive income portfolio
This is probably the most crucial time to start building your good habits towards your passive income revenue. If you are making some pocket money from your passive income portfolio on the side while you still work a regular job, it’s easy to fall into the trap of seeing this passive income money as “free money”. Let’s say you are making $300 a month of passive income. $300 won’t change your life, they won’t pay your rent, they won’t pay your car lease… but they could buy you the new Apple watch today, a new phone a couple months from now and a new flat TV screen by the end of the year.
That can be tempting, but if you are serious about becoming financially independent through passive income you need to resist the urge and start building good habits towards your passive income portfolio.
The best habit you could develop at this point is to simply ignore the fact that you are making any extra money and reinvest 100% of whatever you make from passive income into your portfolio.
Too much? Ok, you don’t want to get demotivated either. If you are the kind of person who needs to touch the results, then do the following. Every month put away and reinvest in your passive income portfolio 50% of what your portfolio has generated. The other 50% is yours to enjoy, spend it however you like! As long as you reinvest 50% you can enjoy your new Apple watch without any remorse knowing that your financial freedom is getting closer and closer each month.
So remember, if one month you make $300 you reinvest $150, if next month you make $80 you reinvest $40 and if the month after that you make $900 because of the Christmas season or whatever other reason it might be, you reinvest $450. Again, don’t fall into the trap of just reinvesting $150 the month you make $900. You will only be sabotaging yourself!
When you start earning some real money from your passive income portfolio
Now let’s say you’ve been growing your portfolio for a few years now by following the method in the point above. Or maybe you just hit a home round and have started making some serious money in a very short period of time. No matter how much you are making, you still need to develop good habits towards this money, otherwise you might as well just go gamble it all at the casino…
So what strategy can you put in place to make sure you are doing things right? Well now that you are making some real money, the kind of money that allows you to quit your job and live entirely from your passive income portfolio, what you need to do is give yourself a salary. Yes, you’ve heard me right, a salary.
If you are thinking “why the hell will I give myself a salary now that I’ve quit my job?” remember that the goal here is to achieve financial freedom, not to become the next Paris Hilton. I’m not saying you have to eat rice every day, give yourself a decent salary that will allow you to live your lifestyle comfortably at the same level you were living when you had your day job (remember, passive income is as hard earned as any other money!) and reinvest the rest into your portfolio.
If you do things right your portfolio will keep growing year over year, and if it does you can give yourself a moderate salary rise to reflect that, but don’t go crazy, do it slowly and in incremental steps. In other words, stay humble.
There is no such thing as free money, so never think of your passive income revenue as such. That portfolio hasn’t built itself, you’ve built it, and any money it makes is your reward for the job done.
While your passive income monthly revenue is not enough to cover your monthly expenses remember to always reinvest a percentage of your earnings and feel free to spend the rest. That will keep you motivated while still growing your portfolio.
When your passive income monthly revenue gets to the point where it’s enough to cover your monthly expenses then give yourself a comfortable salary and reinvest the rest in your portfolio.
If you follow these simple rules you will be developing good habits towards your passive income revenue. These habits will help you make your portfolio more robust and reliable so that you don’t find yourself having to go begging to your old boss for a job a couple years after quitting.