As laid out in the Path to Financial Independence, once we have enough passive income to pay our expenses, we no longer require employment. There are numerous ways to generate passive income: investing, rental properties, royalties, and/or side jobs are just a few examples. There is one method however, that allows you to generate passive income with virtually no work. It is the method that I focus on 100% currently, and that is through investing.
There are 3 simple steps to get started with investing:
- Set-up an online brokerage account
- Put a percentage of your savings into your brokerage account
- Decide on how to invest your money
After that, you just get to sit back and watch your money grow. Investing is one of the only ways that you get to tap into the power of hundreds of the most successful companies in the history of the world that employee some of the most brilliant thinkers alive. And they all work for you! They toil away at their jobs cultivating the world’s greatest products and services while you do whatever the hell you want to do. They make you money 24/7 with no effort required on your part. Sound too good to be true? It’s not always a smooth ride, but if you stick with it over the long term, it’s about as close to a free lunch as you can get. Let’s dig in.
Set-up an online brokerage account
You have the option of paying a professional to do all the work of setting up your investments. This is a bad idea. It is so easy to do on your own and studies have shown that investing in an index fund that tracks a common index like the S&P 500 outperforms the professionals anyway. I use an online brokerage. It has a very easy to use interface and they have all the tools that I’ve needed up until this point. They charge 7 bucks to execute a trade but are always running promotions for new investors. You are also able to easily set-up a savings account through the same website that currently pays about 0.75% interest. But you don’t want to leave your money sitting there too long. Just a good place to park it until you save up enough so that the $7 trade execution isn’t eating into your capital too much. If you have $100 to invest and the trade cost is $7, you’re immediately down 7%. That’s tough to overcome. I personally wait until I have about $1000 saved up to make a trade, but you can start lower.
Put a percentage of your savings into your brokerage account
Financial gurus generally recommend having an amount of savings set aside for emergencies or other cash needs, and I agree here. It’s always good to have cash on hand for the unexpected so that you don’t have to sell your investments to cover an unexpected cost. Cash also reduces the volatility of your investment/savings portfolio when things go south. Hint: they have and they will. But don’t go overboard here. By parking your money in a savings account, you will typically loose money because the interest you earn on your savings doesn’t keep up with inflation. So a dollar you save today will be worth less than a dollar next year. I stay at 10% cash. This means that 10% of my liquid net worth is in my savings account – liquid meaning things I can cash out easily like savings and investments, not things like houses and cars.
Decide how to invest your money
A million people will tell you a million different things. I try to keep it simple but aggressive by putting the remaining 90% of my liquid net worth all in stocks. One of my favorite financial gurus, Jim Collins, recommends an 80/20 approach with 80% in stocks and 20% in bonds. This is solid advice as well. Plus the guy put out a freakin’ awesome YouTube video that describes his approach:
Of my 90% I invest, I do it in two ways:
- 80% in the Vanguard S&P 500 ETF (VOO) – this is my base, my fortress of f*cking solitude, and until you get your head wrapped around investing, put all your stock investment money in a S&P 500 fund.
- 10% in individual stocks – this is my “play” money. It keeps me interested in learning everything I can about companies and their stocks and how I can make money from them. I’ve had some awesome gains but equally as many terrible losses. For every Apple I’ve picked (hundreds of percent return), I’ve picked a Washington Mutual (went to 0). I’m getting better, but I don’t expect to be perfect.
So there you have it. A game plan that can get you up and going in minutes with an example of how I approach it. But the key is not the specific ways I approach investing but the message around investing itself. You can generate stress free passive income that gets you on the path to early retirement, you just gotta get started.