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How to Never Work Another Day in Your Life, The Money-System Portfolio

by MJ DeMarco · 42 comments

[Image: TheLuxuryCollection]

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?

They can’t.

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)
Yield: 5.57%
Sector: Government Bond, Australia/Asian

PMM – Putnam Managed Municipal Trust
Yield: 6.06%
Sector: Municipal

AWF – Alliance Bernstein Global Income
Yield: 8.07%
Sector: International Emerging Bond

PMT – PennyMac Mortgage Trust
Yield: 12.2%
Sector: REIT

FXA – Australian Dollar
Yield: 3.57%
Sector: Cash/Currency

SO – Southern Company
Yield: 4.25% (Pays Quarterly)
Sector: Utility

PFO – Flaherty Preferred Income
Yield: 7.49%
Sector: Preferred Stock

I’ve attached the PDF that shows the “passive income” from this portfolio.

The Result

$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.

Municipal Bonds
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
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 Instruments
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)

Holding Periods

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!)

Financial Disclosures
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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Comment Guidelines: We all have opinions and I'm cool with ya disagreeing with me however anonymous comments, stupid comments, trolling, hating, and other uncivil comments will be deleted.

  • http://www.facebook.com/people/Alexander-Bauer/100001076776337 Alexander Bauer

    Hey MJ,

    great advice. I’m currently

  • ^eagle^

    This is great MJ if you have a large lump sum of cash.  But after 20 years of trying to make a lump some  I haven’t been able to make those types of investments.  Not to down grade you but coming up with the cash is not as easy as you make it out to be.  I have tried numerous different  systems including real estate,  Investments.  and various businesses both brick and mortar and online.  I haven’t given up but Hitting the “home run”  Isn’t as easy as it sounds in the book.    I still haven’t given up but Now I am trying MLM not as end but a means.  And it is one of the best means around that I can find with little to no risk and huge rewards.  yes it violates the principal of control but not Scale.  

    • http://lifedefacto.com/ Nwokedi

      I don’t believe MJ makes the “home run” sound “easy” in the book.  In fact he rails against that in stating that most people see the “home run” as an event instead of what it really is: a process. 

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  • C.

    Its not easy, he never states that,  its just possible to attain wealth much quicker than most people think!!!

  • Michael

    Great stuff, MJ.  We (wife and I) are currently at the $2 million mark, and your article shows us exactly how we could afford to “hang up our spurs” right now.  Not that we’re quite ready to do that!

    • http://www.themillionairefastlane.com MJ DeMarco

      Wow, impressive!  Keep up the good work!

  • unicon

    This is a generous expose’ of exactly what is being done with a pool of money from 1-10 million, love this precise examples, no one does this!

    A step by step growth of principle over time in the optimum products provides a path testing optimum strategies to expand geometrically.

    One comment on real estate wealth, the truth is all my acquisitions are never with 20% down and all produce cash flow even in downturn – buying to hold.  The leverage is as fast as your capacity to understand and learn creative structuring. Creative structuring is unlimited. Deals can be done overnight with 100% returns.

    The problem with real estate is that it is not that passive at the 5 million asset range with approximately 1 million in debt. Management is the leverage builder and the key to increasing your capacity. Management risk is very leveraged, if you can reproduce yourself you can have 100% passivity and concentrate on adding to inventory.

    The one superior aspect of property to cash is that it will appreciate while cash depreciates. The other is that you can build inventory tax free for years (zero tax vs 15%)

    Real estate creativity is only limited by your mind precisely because it is tangible, fixed, and limited.  Cash is liquid and toward the intangible, but in essence unlimited so very transitory. The identity is a tool where real estate can be the very heart of a lifestyle and power base. They are both at the extremes of the balance sheet – one very liquid and the other non-liquid. The paradox is that at critical mass of real estate acquisitions - illiquidity is a non-issue because of unlimited debt financing at a moments notice.

    Cash and Real Estate are the most powerful assets but one is like water and the other like a redwood.

    Unicon

    • spencer

      Thanks MJ, not too many guys out there lay it out like this. Thanks for giving us specific examples for us to see that it is possible.

  • Dolphin2001

    MJ, Love Passive and YES, being essentially “your own bank” is awesome, getting to massive savings IS the KEY. Currently at 15K per. mo. passive income with real estate, owned, not mortgaged, reliable for 15 years plus.  However, just read your book and very much appreciate your honesty and persistence to even finish it, considering you didn’t have to.  It’s helped inspire me to reach out for more and not get sucked into developing another mediocre business that violates NECST andputs me on an UN-FUN treadmill unnecessarily.  See you in the fastlane sometime……………………

    • http://www.themillionairefastlane.com MJ DeMarco

       Impressive!

  • http://www.facebook.com/jwhagarty James William Hagarty

    thanks for this post MJ. re-reading things like this helps me keep my eyes on the goal. 

    • Cocomi

      OK ! let’get to sum lump about 3000K :-)

  • Dominickjr

    Hi MJ…I like that your book is ..to the point.
    Do you have advice on the best way to get a book sold to the masses if you have a self published book? I finally did write my book and getting it sold is the hard part of course…any advice besides promoting it thru free media like twitter, fb, and sites like that would be appreciated. Thank you Dominick

    • http://www.themillionairefastlane.com MJ DeMarco

       That’s the hard part and it still is, especially when it relates to a topic that is out in left field (Not readily accepted as common advice.)  I might actually write a book on this topic about how to run your own self-publishing business.  Most sales are generated via word-of-mouth; not any particular advertising or marketing “secret sauce”.

    • http://www.scottbradley.name/ Scott Bradley

      Dominickjr – Great question. I have previous experience promoting a self published book  for an author I worked full time for. 

      Here are some tips for you…

      1) Build as many relationships as you can with people in your niche who are speaking to the same audience as you are. Seek them out to form a win/win situation with them. Focus on helping them first, and then when you feel it is appropriate ask them to help you. 

      2) Focus on building an e-mail list giving away the first few chapters of your book. If your content is compelling people will buy the book, and even better you will be able to contact them again in the future. 

      3) Integrate a blog into your website and focus on writing “what” and “why” content surrounding the topic of your book. For example (The X things You Need To Know Before You XYZ). Post at least 2-3 times per week, and then after you publish an article leverage your network of contacts and all marketing assets you have available to drive as much traffic through the post as possible. Make sure you have your “e-mail list builder” integrate into your blog post so you are able to leverage the traffic effectively. 

      4) One other thing you can do is focusing on building relationships with bloggers who can review your book. Don’t send them a cold e-mail from the start. Instead be sure to leave comments on at least 5 of their blog posts (really thought out comments), and then send them an e-mail stating how much you appreciate the content they create. As you start going back and forth ask if they would review your book on their site. 

      This should get you started. 

      If you have any further questions, and/or need any help feel free to contact me. (Click my name at the top of this comment…and it will take you to my site where you can reach me.)

    • http://buy-expired-domains.com/ Thomas Hoi

       I got my book “The Art & Science of Success” published as a co-author, together with over 30 authors, each chapter written by an author. On the day the book was launched, it went straight to the #51 spot of Amazon.com overall rank.

      http://www.thomashoi.com/wp-content/uploads/2011/07/Amazon-Overall-Rank-51-Screenshot.jpg

      What happens is that months before the book launch, the main author had emailed all his friends who are already best selling authors themselves, to email their own lists of fans. To sweeten the deal, the main author give bonuses of over $2,000 (videos and ebooks) to people who buy the book for only $21.

      Once the marketing is done, the main author then send a final email to everyone so they will buy the book on the same day, making the book to become “best seller”. The process is repeated again for another best selling author in the group.

      Hope this helps.

      Blessings,
      Thomas Hoi

      • http://www.themillionairefastlane.com MJ DeMarco

         Thanks Thomas for relaying this strategy!

  • Twitter: RajIyce1

    Well Done MJ.  I was also burned by real estate and your right about the risk/benefit.  The problem with buy and hold real estate is that the small costs keep adding up and up and up. Taxes go up, utilities go up, units are vacant longer than you expect, maintenance goes up. This completely kills the measly few hundred bucks per unit that looked so compelling on your spreadsheet. And I’m not even talking about the erosion in prices!  As soon as you’ve got a short-sale or foreclosure next door forget about it, your capital gain is kaput.  Add this all up and you’ve got a ‘death by 1,000 cuts scenario’ the real estate gurus fail to mention.  Plus unless your business is real estate then dealing with all the headaches will drain your energy faster than the speed of light.  

    • http://www.themillionairefastlane.com MJ DeMarco

       Raj, I have some friends and acquaintances that were heavily in the “Dual-Dad” real estate philosophy … every single one of them either went A) Bankrupt or B) Lost their homes to foreclosure — not one of them is living the financial free lifestyle as the books ascribed.  The only one I know doing well is one who actually started a cash-flowing business not predicated on real estate as the main driver.  Thanks for posting. 

  • http://www.ScottBradley.name/ Scott Bradley

    MJ – This is probably one of the best articles you have written on your blog. Thank you for breaking it down and making it easy to understand. I really appreciate you taking the time to do this.

  • Antonio Rillera

    Awesome article MJ, after reading your book I was wondering what you actually invested in to get those 5%+ returns this clarified a lot. I am no where near the money system yet for myself but I will be one day and have bookmarked this for later. Times change though so besides keeping up with your awesome blog, what should I be reading and learning on how to do these types of investments? Its practically another language to me (REITS, close end bonds, etc). Any sources you trust and recommend?

    Thanks as always for great content!

  • Rome

    MJ,

    I’d be curious to know your recommendations for learning more about investment strategies for passive income… from scratch?

    I don’t know much about the stock markets or bonds and how it all works. Do you have a recommended book(s)? How did you get started in investing?

    Thanks.

    • http://www.themillionairefastlane.com MJ DeMarco

       My degree is in finance although I really learned more after college.   Hit Amazon and try to find something introductory, and with good reviews.

  • Kevinhajoveck

    1) How do you explain guys like Buffett, Soros, & Icahn getting rich through the markets?

    2) What books, material, or methods did you use to learn more about investing in stocks, bonds, getting interest, etc

    3) Some of your investments seem to carry a higher level of risk than just buying well-known stocks like Coca-Cola, McDonalds, etc that pay much less in yield but are a safer bet – thoughts on that?

    • kate

       I have the same question, MJ – care to chime in buddy?

      • MJDeMarco

         See above.

      • http://www.themillionairefastlane.com MJ DeMarco

        See above. =)

    • MJ DeMarco

      Icahn and Buffet are activist investors, NOT retail investors. This is huge, a particular Fastlane relevant… activist shareholders acquire shares with the intent to influence management, change policy, and get seats on the board … in other words, they seek control to influence share price. Retail shareholders like us, have NO CONTROL … activists can influence, you or I, cannot. See: http://www.investopedia.com/terms/a/activist-investor.asp

      As for books, I can’t recommend any specific “introductory” financial book since I’ve been reading more advanced topics however this is something I might write in the future. I’ve been getting a lot of “how do I learn the basics” types of emails … perhaps I’ve uncovered a need? =)

      If beta is the measure of risk, then KO and MCD probably could be considered “safer” … I actually prefer the volatility of CEF’s because they offer more chances at buying opportunities.

    • http://www.themillionairefastlane.com MJ DeMarco

      Icahn and Buffet are activist investors, NOT retail investors.  This is huge, and particularily Fastlane relevant… activist shareholders acquire huge amounts of shares with the intent to influence management, change policy, and get seats on the board … in other words, they seek control to influence share price.   Retail shareholders like us, have NO CONTROL … activists can influence, you or I, cannot.  See: http://www.investopedia.com/terms/a/activist-investor.asp

      As for books, I can’t recommend any specific “introductory” financial book since I’ve been reading more advanced topics however this is something I might write in the future.  I’ve been getting a lot of “how do I learn the basics” types of emails … perhaps I’ve uncovered a need? =)

      If beta is the measure of risk, then KO and MCD probably could be considered “safer” … I actually prefer the volatility of CEF’s because they offer more chances at buying opportunities.

      • Kevinhajoveck

        Wow, an author who actually responds to his readers? RARE!

        Thanks for the clarification, your points makes much more sense now…

        • http://www.themillionairefastlane.com MJ DeMarco

           Abso-FN-lutely!  =)  Thx for stopping by.

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  • Jules

    I loved this post MJ. Really life-changing advice for me. I hope to see more like this from you.

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  • Nick

    Question – the money system account should be in a taxable brokerage account i assume since you are using muni’s? I recall in the book you mention with profit from business 20 % to live on 40% taxes 40% into money system account. Just curious if there was more effecient way to shelter the growth of the money account. excellent post.

  • Fred Gustafson

    Very interesting article! I think this is the method I’ll use for my early retirement. I’m going to study these investments and learn more about them.

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  • John

    MJ, do you teach people how to invest in this “money system” too, not just building businesses?

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