Passive Income Vs Earned Income

In my last few blogs, I have mentioned the importance of creating passive income as the cornerstone to wealth building but I haven’t exactly explained why. I already explained how passive income, specifically from income producing real estate, allows for extremely advantageous tax advantages. To make this point salient, let's compare a demanding and high paying occupation such as an analyst role at a Bulge Bracket Bank versus a real estate investment. The analyst job pays $100,000 per year and according to www.smartasset.com, net income after taxes is $66,000. To some, this may be a lot of money while to others this is far too inadequate of compensation for the stresses of working at an investment bank or other similar occupation. And what happens when you stop working and retire or want to take a six month vacation? The income goes away if your efforts do and to people trapped in the corporate rat race, a six month vacation sounds like an impossibility! So in order to create a passive stream of income equal to our high paying corporate job ($66,000 after taxes), we need to build an investment portfolio with a strong yield. A 10% cash on cash return is reasonably achievable while retaining a low risk profile and growing the underlying asset value. This means one needs $660,000 saved up in order to fully replace their investment banking income. Woah, that sounds like a lot of money and it is, but real estate is NOT a get rich quick game. However, this income will follow you for the rest of your life while the day job’s income disappears at retirement. Moreover, aggressive strategies, such as value-add whereby the property value is substantially increased, allow for much quicker growth through refinancing. Another remarkable difference of the passive income created by the real estate investment versus the active income from the investment banking job is the fact that the real estate portfolio will work for you 24/7/365, thus permitting you to take that six month vacation if you so choose. This idea is the absolute key Robert Kiyosaki stresses in the most influential personal finance book of all time, Rich Dad Poor Dad. Kiyosaki wants to inspire people to make their money work for them rather than the other way around. I hope this post has given you a glimpse at the power of passive income. If passive income resonates with you, I implore you to read Rich Dad Poor Dad, which is the starting point for countless entrepreneurs and six month vacation takers alike!

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