Quick question: do you pay yourself first or does someone else get paid before you? How important are you to yourself? Most people would answer “very important” I hope. Yet,...
The understanding of passive income streams is very important. A passive income stream is what it sounds like, incomes that stream or flow to you automatically after you managed to open the “tap”. Capital gain is what most people think investing is all about. A capital gain is a onetime thing and in part similar to a salary or a bonus.
There is a perfect example story that explains the difference between passive income streams and salary/capital gains very easily.
The parable of the pipeline
Once upon a time there lived two ambitious men called Pablo and Bruno in a small village in central Italy. They were the best of buddies and big dreamers. They used to endlessly talk about how they would become the richest of men in the village. They both were smart & diligent and all that they needed was an opportunity to prove themselves and become wealthy. One day this opportunity knocked their door. They were appointed by the villagers to carry water in buckets from a nearby river to the cistern in the Town Square and get paid by the amount of buckets they delivered during the day. Both were overjoyed and started to work immediately. At the end of the day Bruno was very happy with the opportunity but Pablo was not very sure about the hard work and pain of carrying the heavy buckets. He didn’t really feel like going to work the next day and vowed to think of a better way to bring water to the cistern.
The next day Pablo told his friend about his new idea to bring water to the village. Pablo suggested that instead of carrying buckets back and forth to bring water from the river they can build a pipeline from the river to village. Bruno was not very happy with the idea as it sounded new and there were no short term benefits from the idea and he rejected that idea outright and was happy with whatever he was earning. But Pablo did not give up and worked on building the pipeline. He worked during the evenings and weekends along with the bucket carrier work. This brought down his productivity and he wasn’t able to earn as much as Bruno did. Soon Bruno earned quite a fortune but Pablo did not give up on his pipeline. He still hoped and believed that one day his dream of bringing water to the cistern automatically would come true.
While Bruno spent his evenings and weekends at the bar or relaxing at home, Pablo had to work hard on his pipeline. He kept on reminding himself that “Tomorrow’s dreams are built on today’s sacrifices”. Every step is a step closer to the goal he kept on saying to himself as he dug every foot in the ground. “Short-term pain equals long-term gains” he repeated to himself as he went to rest in his humble abode after a hard day’s work. “Keep your eyes on the prize” he repeated over and over as he drifted to sleep.
Hours turned into days, days turned into months and months turned into years but Pablo did not give up. His big day was coming nearer. His burden of carrying buckets was coming down. He watched his best friend carrying buckets, looking very tired, his shoulders stooped and villagers teased him on his gait. Bruno was doomed and was angry as he was destined to carry buckets day in and day out for the rest of his life. Finally Pablo’s big day arrived and he was praised by all the villagers for his creative idea. Pablo, the pipeline maker came to be known as Pablo, the miracle maker. He was lauded for his efforts by politicians and people all over the world.
Recruiting his friend to help:
On watching his friend struggle with the bucket he went and offered his friend an opportunity again to work with him. He told his friend “The pipeline I built isn’t the end of a dream. It is only the beginning! I plan to build pipelines all over the world”. Bruno finally saw the big picture and shook hands with his old friend.
Pipeline Dreams in a Bucket Carrying world:
A lot of years passed since this all happened. Bruno and Pablo were retired but still had millions coming in as their income from their pipeline business. During their leisure trips to their village they would meet their childhood friends carrying buckets. They used to suggest the idea of pipelines to their fellow mates. A few of them would jump at the opportunity but most of them would dismiss the pipeline ideas with excuses like “I don’t have the time”, “My friend tried this and failed”, “I’ve done this all my life and would like to stick on with it”, “I know some people who lost money in this, I don’t want to take the risk”. Bruno and Pablo felt sad for these people who lacked vision and dreams.
What can we learn from Bruno and Pablo?
Having a job or making capital gains is the same process as walking with buckets. Every month most people work a certain amount of hours and get paid for their work, one month’s work for one month’s salary. With capital gains a risk is taken when we place money into something and then we hope for the price of that thing to go up, if it goes up and we sell with a profit we have made a capital gain. The capital gain is a one-time deal just like the salary, if you want more capital gain you have to do the process one more time, like the next month at work.
To build a pipeline for passive income streams on the other hand is a totally different process. Usually there is a lot of work involved and we don’t get paid for the time we put in. When we want to build passive income streams we will get paid based on performance and we have to deal with delayed gratification. A lot of people might think it´s unfair that there is a small group of people that have most of the assets in the world but the fact is that most of those people worked really hard on their success and were OK with delayed gratification. Bill Gates has stated that he didn´t take one day off from work in his twenties, that’s what I would call dedication for success. He didn´t get paid for every hour he put in at work, he got paid later on when people started using Microsoft´s products all over the world. He didn´t even care about the money, he wanted to change the world, and he did. Becoming the richest man in the world was just a bi-product.
Are you running with buckets or building a pipeline?
There´s nothing wrong with having a job and a salary, almost everyone does. The thing that we need to understand when we choose to run with buckets is that time will always limit us. We can only put in a certain amount of time, that’s it. When it comes to passive income streams there are no limits, there might be a limit to the size of one passive income stream but there are no limits of how many income streams we can have. Actually the more streams of income we have, the more secure our economy will be. Think about it, if you have a nice job with a good salary of 10.000€/ month and you lose that, there might be some big consequences. On the other hand if you have 20 different passive income streams that give you 500€ a month your monthly income would be the same 10.000€ but the risks are significantly lower. If you lost a couple of your passive income streams it wouldn´t really be a big deal, only a small part of the total income would be lost.
Examples of passive income streams
I made some articles about this before:
I wrote about some Passive income ideas that work in this article before and how to turn your home into an income producing asset in this one.
The fact is that in some cases it might be really easy for you to create a passive income stream and sometimes it might be really hard and take a lot of time. I see everywhere around me, different ways that people can use to create passive income streams today, the thing is that you have to train your mind to see those things and understand them.
Where I live at the moment in Thailand, there is a woman that has a small coffee shop. I asked her and she makes about 25000 Bath / month after everything is paid for. Most people here earn around 10000 Bath so 25000 is a pretty good monthly income. Now with a passive income trained mind I think: Take in an employee, teach them to make everything exactly as you usually do it, you pay the employee 10000 Bath and you keep 15000 Bath. This is thinking in ways of passive income streams. While she still maybe have to do some of the work there has been a lot of time freed to do other stuff. She can start looking for a new good location to open another shop and do the same process all over again, creating more and more passive income streams and more security. It´s not rocket science, all it takes is a small change in thinking and a bit of financial and entrepreneurial education.
I met a guy a while back when I was out golfing. I asked him how he was able to go out and play golf in the middle of the day on a Thursday. He told me that he has a business in Bangkok that rent out taxi cars to drivers for 1000 Bath per day, the driver then drives and gets everything that he makes from customers. The guy said he had 200 cars now but started with just one car 10 years before. With a quick head count I understood why he could enjoy a round of golf whenever he wanted to. 200 cars that bring in 1000 Bath each per day, even though he has to maintain the cars in good shape 200.000 Bath (5000€) per day is a pretty handsome income to make from the golf course!
I met another guy just a couple of weeks ago from Korea, he and his wife came here for a 3 month vacation, so of course I had to ask how that was possible. As it turns out he had created an application that lets you stream movies to your phone or tablet (like Netflix) but about half of the videos and series where Korean and the American movie subtitles where in Korean. He told me that the service is about 500 Bath (12€) a month but he gave me a free account. About 10.000 people use his application which might sound like a piss in the Nile when compared to Netflix 60.000.000 users (!). But with a quick head count I can see that 120.000 € per month is not really a piss in the Nile. In fact I think that’s about the same as some of the best paid bank CEOs in Sweden, who I’m pretty sure can’t go on a 3 month vacation to Thailand whenever they feel like it.
As I mentioned before, Renting out a part of your home or your second car when it´s just standing in the driveway anyway. Renting out a vacation home, building a sales network, doing affiliate marketing and investing in Better Globe trees are all ways to create passive income streams in different ways and sizes.
As you can see passive income streams in different forms can be very powerful and enables choices in life that we can´t get in any other way.
Now, what is a good next step?
Read more, learn more and do more.
Read books like “Rich dad poor dad” or “The richest man in Babylon” and sign up for my free E-book. Read more and look around on this blog, here is a lot of great information that will help you out. Start to actively do things and build pipelines with streams of passive income running through them. Keep motivated with the help of motivational audios and videos. Attend seminars and webinars. Be open minded and look into opportunities that come your way.
Start to pay yourself first. Instead of paying all your bills first and then give yourself the leftovers start to pay yourself for your future investments the first thing you do when you get the salary. Then pay the bills with the rest of the money. This is not only important for your future investments but also important because it shows your unconscious mind that your dreams are important, more important than your bills. Most people don’t prioritize their dreams at all, and so they never come true.
How big part of your salary should you pay yourself?
I don’t know, how much are you worth?
Start with 10% maybe then when you can do that easily you can increase the percentage in small steps. Now a bunch of you might think I’m crazy, 10%!?
Well try with 5% then, or 1%….. Then work your way upwards. Most people can spend money on alcohol, party, cable TV, movies, vacations, eating out, new clothes even though they don’t need them etc. etc. And then they can find 10% of the salary to create the life of their dreams. What would happen in the case of a job loss or illness so the income gets cut in half, I bet there are ways to cut down spending so you can still survive. That’s 50%! Think about it…
Isn´t it better to cut 10% today so you never have to worry about losing the 50% somewhere down the line?
Passive income together