Passive income, passive income, passive income.
The holy-grail of “making money” is passive income and everyone loves talking about it.
And like any subject regarding how to create money, specifically passive income, the opinions vary from guru-to-guru.
One guru says cash-flowing real estate is the best passive income generator.
My take: Every person I know who followed the “real estate” formula as preached by various “dual dad” gurus had it blow-up in their face with the housing collapse. Personally, I can’t imagine taking out a 6-figure mortgage, and forking out 20% down on a house that might cash flow a few hundred bucks.
Another says affiliate marketing is the key to passive income.
My take: If you enter a crowded marketpsace, a passive income today won’t be a passive income tomorrow. AM also violates the Commandment of Control; will the Google Giraffe/Rhino/Honey Badger update kill your golden-goose with a simple algorithm change? If you can diversify your AM offerings where control hierarchies can’t disrupt your cash-flow and are premised on your own content control, you might have gold.
Then there’s the guru who says network marketing is the best passive income generator.
My take: There are always serious longevity issues with MLM (caused by Commandment of Control violations) not to mention, you have to make sure you and your downline continual buy cases of product every single month for the rest of your life.
Despite all the various famed venues for creating passive income, the best source for creating a passive income is rarely discussed AND ironically, is the one used exclusively by the rich.
What is it?
It’s the good old “money system”.
In other words, interest and dividends earned on lending activities, or company ownership.
In my book, I give the example that 5% interest on $10,000,000 is a whopping $42,000/mo in passive income that is generated month after month, for years, without touching the principle.
This assertion brought forth a litany of emails to me asking “HOW? And HOW in today’s low interest environment?”
Reader curiosity on this topic absolutely shocked me; before a money system can work, you have to have a rather large sum of money and that is what The Millionaire Fastlane is about.
The money system is the destination; The Millionaire Fastlane is about the journey.
The Benefits of a Money System
So what is a “money system” and why is it the best passive income vehicle out there?
First, income sourced from a money system is easier to shelter from tax. Marginal rates on earned income (income earned from a job) can be in excess of 40% when state taxes are added. The government takes your taxes before you even get to cash your paycheck!
Conversely, tax rates on qualified dividends and long term capital gains are 15%. On municipal bonds, 0%!
Follow the Money
What do rich people do?
If you ever wondered how on earth does Mitt Romney, a multimillionaire, get away with paying only 15% taxes? How about Warren Buffet?
Simple: A money system where income is derived from interest, dividends, and capital gains.
And yet, do you think Mitt Romney is RICH because of the stock market? Or because he leveraged Fastlane mathematics via leveraged business systems? (Some might argue unscrupulously which is not for discussion here, please stick to the point of this article.)
Second, money systems are the most “hands off” passive income generator in existence.
For me, I monitor my investments approximately 1 hour a week. Like any investment, I monitor technical and market changes (both economic and regulatory) for that particular vehicle. Just like regular equities, money system investments (bonds, closed-end funds, currencies) can become oversold, or overbought. I watch these instruments as I would watch a regular equity.
Third, money systems are highly liquid.
I can liquidate any position in my money system usually in MINUTES.
Can you liquidate that 3 bedroom house on Main Street in minutes? How about that network marketing downline or that internet company you built? Can these be liquidated in an instant due to changing market conditions?
And finally, money systems are wholly supported as a part of our financial system. The “money system” is the default strategy that seniors rely on to retire and is considered the final destination in the Slowlane: Save for 50 years and when you retire with millions, those millions will then spawn interest and dividends.
Leverage A Fastlane Business System to Leverage a Money System
As I mentioned in my book, I don’t use the markets to create wealth, I use them to create income and liquidity.
Wealth creation should be left to your Fastlane business.
In order to amass enough cash to enjoy the benefits of a money system, deploy a Fastlane business founded on the NECST Commandments. Give it 3, 5, or 10 years. Build something with value. Cash flow an enormous income where you can save most of it, resist exponential lifestyle temptations, and then cash out. (Or take a silent position to continue cash flow).
Then, when you have enough cash to lend, you can use the money system strategy at ANY AGE.
The “Never Work Again” Money-System Portfolio
So in response to reader emails, I give you a “money system” portfolio that generates a regular, monthly passive income with virtually no work. Even in this low interest environment, I can realize returns between 4 and 8% — by using a mix of dividend paying stocks, closed-end funds, bonds, and REITS, you can make the vision of “never work another day in your life” real.
Here are the actual assets based on current market data, yields, and values: I’ve based the yields on a “money system” investment of $1,000,000 minimum all the way up to $10,000,000.
The portfolio consists of 7 instruments and of course, more (or less) investment vehicles can be used depending on your appetite for risk.
FAX – Aberdeen Asia Pacific Income – (Government debt)
Sector: Government Bond, Australia/Asian
PMM – Putnam Managed Municipal Trust
AWF – Alliance Bernstein Global Income
Sector: International Emerging Bond
PMT – PennyMac Mortgage Trust
FXA – Australian Dollar
SO – Southern Company
Yield: 4.25% (Pays Quarterly)
PFO – Flaherty Preferred Income
Sector: Preferred Stock
I’ve attached the PDF that shows the “passive income” from this portfolio.
$1 million dollars invested in these instruments would give you a passive income of approximately $6,100 a month with a low 11.5% tax rate.
Now consider this: If you’re debt free with no mortgage, can you live on $6,100/mo?
Jump the scales up to $3 million and you’ll earn nearly $20,000/mo in income with an absurdly low tax rate of less than 15%.
Can you live on $20K a month?
Most people think they can. I know I can.
And then, what would you during this time? What crazy dreams and experiences might you attack?
For me, I wanted to write a book without the worry about market acceptance, sales, or anything. I just had to get The Millionaire Fastlane off my chest! It’s the dream financed by the money system!
Additionally, the management of this method for income is virtually nothing.
Time becomes your asset because as the months roll by, so does the income.
Breaking it Down – Comments and Analysis
Closed End Funds
I like investing in Closed-End Funds — I prefer CEF’s because I can buy them at a discount below NAV. When premiums rise to uncomfortable levels, I can sell. For me, the discount/premium adds another “technical” buy/sell indicator. Here are some charts of the featured CEFs.
The higher your marginal tax rate, the more focus you should have on municipal bonds because their Federal tax rate is zero. The muni market has been on a tear in the last year and while the income has been great, the capital appreciation has been even better. While some gurus predicted doom-and-gloom in the muni market, I was buying. As your marginal rate goes up, your muni investments should follow.
Dividend stocks enjoy both capital appreciation and dividends. I make a habit of writing covered calls on any dividend equity position because again, I’m interested in using the markets for income, not wealth. (Writing covered calls limits upside appreciation.) Southern Company is a favorite of mine. While I’ve enjoyed dividends and option premiums, the stock has also appreciated nicely. You can also write naked puts on down-drafts.
Other great passive income instruments that work well with the passive income portfolio are Canadian Royalty Trusts (which pay monthly dividends) and Master Limited Parternships (MLPS) which also spawn reoccurring income payments. I also prefer to hold idle cash in appreciating currencies like the AUD. (Currently overbought; I hold no position currently)
As I mentioned briefly above, I don’t blindly hold on to these investments and “hope for the best”. I watch them and look for buying and selling opportunities. I also pay attention to the duration of the holding period as anything held longer than a year incurs long-term capital gains taxes (15%) versus short term capital gains which are taxed at marginal rates (as high as 35%).
For example, I just recently liquidated my entire position of FAX — with the latest run-up of the Australian dollar and a technical breakdown in the chart, I thought it was best to sell and lock-in a long-term capital gain. (Taxed at only 15%!) When (or if) FAX retreats in line with the AUD, I might reopen the position. As with most investments, you cannot treat these as “Set it and Forget It” but more like, “Set it, Peek at It, then Forget It”.
How to Use This NOW (Assuming You’re Broke!)
Examine the chart and PICK YOUR NUMBER … at what level of income can you live on, and comfortably? If you don’t need the fancy cars and the big house, $1M just might work for you! If you love the extravagances of life, you might need $10M, $20M, or $50M.
The bottomline is this: Know the level at which creates the optimal living situation for YOU. Then attack this amount with your Fastlane business. Remember, exponential wealth is NOT CREATED VIA THE STOCK MARKET, it is created via Fastlane businesses, and SELLING STOCK in the public or private markets! (Public markets would be IPOs, Facebook perfect example; Private markets would be a private acquisition!)
I am currently long in SO, PMM, and PMT. I have no plans on initiating any new positions in these securities in the next 72 hours.
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