Today I am featuring an article from my friend and mentor Brad Weinman.  Brad has been involved with Passive Income Programs for over 10 years now and makes a very steady and healthy living just from these kind of programs.  If you want to learn more about Brad and gain even more knowledge about passive income programs you can visit his site at http://www.passiveprofitsmadeeasy.com.  Thanks Brad for the great info!

The Definition of Passive Income

I’m sure you’d agree that if you ask 10 strangers on the street what their definition of “passive income” is, you’ll probably get 10 different answers.

But in general terms, creating passive income means that once you’ve invested your time, money and energy developing and creating an income stream, it should, ideally, continue to produce an ongoing income for you with little or no work on your part.

Then, once you’ve got that passive income stream flowing, you can have the freedom to devote your quality time to either creating a new passive income stream, volunteering to a worthy cause, or just relaxing and enjoying life instead of having to work hard to maintain it. Sounds simple, right?…

Well it is… at least in theory, but we both know that there are all kinds of land minds and obstacles along the path to creating passive income streams. But before we go any further, let’s talk about…

Phase 1 – Investment Funding

If you’re like most people, you’re starting off in Phase 1… unless you inherited a family fortune, won the lottery, or are already financially independent… (and if you’re reading this, I think it’s safe to say that this isn’t a reality for you yet)…

One of the biggest challenges that comes up for people wanting to get started with investing in quality passive opportunities is a lack sufficient risk capital to fund their accounts with.

This issue has been compounded even further with everything that’s going on in our economy and what usually happens is it tends to attract people with smaller budgets to invest in questionable HYIPS (High Yield Investment Programs) and other programs that usually carry a lot of risk because you’re giving your money to someone else to ‘manage’ for you and it’s usually pooled together with everyone else’s money.

I acknowledge the fact that when you’re up to your eyeballs in debt, and stuck in a dead-end job you hate just to pay the bills, the reality if someday having time and money freedom and living your passion can seem like just a fantasy and something that will never happen.

But the bottom line is discretionary income for investing has to come from somewhere, so in this phase, it’s all about creating enough cash-flow and seed capital, which can then be used to invest into quality passive opportunities.

To move past Phase 1 into Phase 2, and ultimately into Phase 3, you have two options: 1. Lower your expenses, or 2. Increase your income. Equally as powerful of the two is lowering your expenses because it frees you from needing to work for money…

Lowering your expenses – Many people overspend in areas like eating out, paying taxes, etc., and you can save a ton of money by accounting for every single dollar you spend over the next 30 days. The first time I did this I was shocked at how much I was wasting on things like dinners out and DVDs.

Every time you spend money, write it down and then look for areas that you can cut back or even eliminate altogether. Cutting back and living without a few luxuries for a few months may be hard at first, but it’s a great way to loosen up some extra cash.

Lowering expenses is easy, most people just don’t want to do it. Think of all the excess you could live without for a little while until you’ve got some money to invest in your future.

Increase your income – For some people, it’s easier to find new ways to increase your income than to try and cut back, especially if you’re already pinching pennies. The main methods for creating cash-flow and money to invest are either from job income, business income or OPM (other people’s money).

Let’s cover this in more detail…

If you’re an employee and have very little or no extra money right now to put towards investing in passive opportunities, you only have a couple options; you either work more hours/get a second job… or you do what makes more sense – you start a business… but not just any business.

After building both traditional businesses and home-based businesses over the last 17 years, I highly recommend choosing a home-based business that allows you to start out on a shoe string budget if needed, learn some new skills, and build an extra income stream part time without interfering with your job.

I’ve said this in previous updates (sorry to those of you already in the know), but trust me when I say that if you’re an employee right now and you DON’T have a business on the side, you’re literally throwing away THOUSANDS of real dollars every year that should be staying in you and your family’s pocket.

It’s not surprising that a growing number of Americans (and Canadians, Aussies, Brits, etc.) are getting completely fed up with working half the year just to pay their taxes.

Aren’t you?

Now that might be a bit of an exaggeration, but only a minor one. I mean seriously, when you add up all of the taxes; both state and federal, school and property, sales, municipal, and on and on and on… most of us wind up paying more than 50% in taxes.

Imagine what an extra $3 – $5K or more in FREE extra income that you weren’t counting on before can do for you. Take that family vacation you’ve been planning for years, pay off some debt, or just live it up a little bit.

So here’s the scoop on where this “free” income comes from… as an employee, can deduct all kinds of expenses from your taxes and get back an extra $300 – $500+ per month from your CURRENT paycheck starting immediately.

All it takes is a ten second adjustment to an employment form. I’m talking about being able to write off your computer, internet access, cell phone bill, magazine subscriptions, seminars, even vacations, and more!

In other words, you’re gonna be able to pocket more money every month just by starting a business on the side. Your only requirement is to show an INTENT to make a profit. If you don’t make a profit your first year (which is highly unlikely), you still get the take the deductions and keep more of your own money.

By the way, I’ve been recommending Ron Mueller’s book to my family and friends for years, “It’s Not How Much You Make, It’s How Much You KEEP That Counts.”

You can pick it up on Amazon.com for less than $40. If you’re currently employed and don’t have a clue about what’s deductible and what’s not, be sure to pick up a copy of this book so you can fill the holes in your leaky bucket starting TODAY!

Make no mistake about it, with the world economy in the tanker and the unemployment rate above 10% in several states, one of the smartest things employees can do right now, if you don’t yet have one… is START A BUSINESS!

Let’s be clear – These funds are NOT intended to be used to invest in HYIPS, gambling, or any other type of money games. They’re for funding verifiable investment opportunities where you have 100% control over how your money’s invested.

So Phase 1 is all about acquiring sufficient funds to invest with, however, some people are able to skip Phase 1 altogether and start at Phase 2 right away…

Phase 2 – Choosing & Investing in Passive Programs

In this phase, you use the extra money you’re making above your cost of living and invest it in passive income-producing assets. Getting here is an accomplishment in itself, so pat yourself on the back. Once you have sufficient funds to invest with, it’s time to decide how you want to allocate it.

Conventional wisdom has taught us that we can generate passive income by investing into stocks and bonds, mutual funds, real estate, and also investing in businesses… but as we’ve all seen lately, we know that many of these ‘conventional’ options can leave us in the poor house if your timing is off.

What’s best for others might not be what’s best for you. So before you decide on what might be the best passive income generating investment methods for you, here are 5 critical areas to consider:

1) How much risk capital do I need to start with?

The amount of money you need to invest really depends on the kind of lifestyle goals you envision for yourself, and just as importantly, your risk tolerance level.

Some passive programs, like managed forex accounts for instance, normally require a minimum starting balance of $10K, while other opportunities have minimums of $500, or less.

As an investor, you’re responsible for conducting your own due diligence on any investment opportunity you’re interested in. But keep in mind that you can do all the due diligence in the world… and still lose money.

Another thing to consider; is it a one-time cash outlay? Or is it a recurring investment plan, where you need to continue to invest more money into it to maintain generating the level of passive income that you need? These are important questions you’ll need to get answers to.

2) What’s the actual net rate of return?

The annual percentage return realized on any investment, minus any fees or inflation, etc. is your net rate of return.

For example, let’s say one of your investments pays you an average of 20% per year on your money. If the inflation rate is currently 3% per year, and you didn’t have any other fees, then the net return on your investment would be 17%.

In addition to the net rate of return, here are some additional questions to consider:

What’s the return frequency? Does it pay monthly, quarterly or yearly?

Are your funds liquid? Can you withdraw them at anytime?

What are some of the major factors which can affect the rate of return?

How about compounding? Can the returns be compounded upon themselves?

3) What are the risks involved?

Before starting the process of choosing various investment programs for your portfolio, every investor should establish his/her risk tolerance level. The higher the degree of risk involved in the investment portfolio, the greater the chances of higher returns (and losses).

The setting of your risk tolerance level is a really subjective issue. But as a general rule, the younger you are, the more risk you can afford to take since you have more time to fix the losses.

On the other hand, older investors will want to take a more conservative approach since they have less time in front of them. Either way, there’s always gonna be a trade off between taking a bigger risk and reaching your financial goals faster, or choosing lower risk opportunities which take longer to pay off.

What’s the risk exposure of your chosen investments?

There are a lot of investments with extremely low levels of risk. These include US Treasury bonds and bills. They’re “risk free” because they’re guaranteed by the US government. Certificates of deposit (CDs), which are issued by banks are federally insured and ‘almost’ risk-free.

Obviously, the price you pay for a low risk investment is a low profit. Add to that inflation and taxes and most if not all of your profits are eaten up – ouch!

On the flip side, you could lose all or some of your initial investment and/or your earnings if you’re not careful. You’ve gotta be fully aware of the risks involved and then make a judgment call based on the risk to reward ratio.

Follow The 3 Rules of Investing:

Rule #1 – Don’t play with the milk money! In other words, never use funds you can’t afford to lose. Do not max out your credit cards or spend money that you need to live on. Do not deplete your savings or put your financial health at risk, EVER! Start with “Test The Water Money.”

Rule #2 – Your Principle is your PAL. Recover your principle. Be sure to pay yourself back your initial investment as soon as possible so you can plant the next harvest. Then re-invest with your profits.

Rule #3 – DIVERSIFY! As any financial advisor and in fact anyone with a little common sense will tell you – you should always spread the risk. Ideally, spread out whatever amount you have to work with into several investment opportunities to reduce your risk. Never put all your eggs in one basket. If one venture goes south, you still have the others intact to produce income.

 
Build your portfolio up to no less then five to ten (or more) passive programs… it may take time, but this is the proper way to do it. Do not, I repeat, do NOT put all your eggs in a single program or two.

And remember to also be patient – I only had to ‘burn my hands on the stove’ one time to learn that important lesson! Smart money stays in an income-earning position. Impatient money usually always eventually loses!

This is like growing a tree, not winning the lottery. You plant many seeds, some will grow and others will wither right away. Water them and tend to them, you can force them a little, but rapid growth is usually shaky and weak, and can collapse on you. After a while, you’ll have several growing “trees” which reach a level where they take off and are generating a healthy passive income for you.

A good philosophy to apply in this arena is best described by Alexander Graham Bell 1847-1922, Inventor and Teacher of the Deaf: “When one door closes another one opens; but we so often look so long and so regretfully upon the closed door, that we do not see the ones which open for us.”

4) Are the profits easily accessible?

Liquidity is another critical part of a sound investment strategy.

Can you get a hold of your profits and/or seed capital when you need it?… Or are the profits only accessible during a certain frequency or period?…

Monthly? Quarterly? Yearly?

 
HOW are your profits paid to you?… Via physical checks? Wire transfer? Online processor?

Are there any other fees involved? Like fund transfer charges, performance or withdrawal charges?

Being able to have access to your money when you want it is an aspect of investing that requires careful consideration since there are many investment instruments that require your money is locked for sometimes months at a time, otherwise you’ll be forced to pay a penalty for early withdrawal, if that’s even possible.

 
5) Are your investments truly passive?

Some investments require constant monitoring, some don’t.

Do you need to constantly watch the markets in order to avoid losing potential profits and/or your seed capital? Do you need continuous effort to manage and/or maintain your investments?

I’ve found that regardless of the passive income streams you’ve created, there’s always gonna be some effort or maintenance involved in keeping that investment earning money for you.

Even investing in a CD requires you to review new rates and rollover an expired CD into a new one. While the time may be minimal, just like watering your garden, you still have to maintain and nurture your portfolio!

All these questions will hopefully help you to determine the viability of your investments to generate enough passive income to fund the lifestyle of your dreams.

Phase 3 – The Reward

This is the ultimate stage when your passive income covers your cost of living, and them some.

Once you reach Phase 3, you have an abundance of money and you have multiple streams protecting you in case one dries up prematurely.

I’m a firm example that it can be done. I have a decent amount of seed capital working for me right now, but things weren’t always that way. In fact, I busted my butt for many years to get to where I am today and gradually built things up over time, fine-tuning my strategy and becoming wiser and more experienced along the way.

You can do the same, but without having to go through the same trial and error I went through.

Today Chiara and I have more freedom than we ever had before. It took many years to get to this stage, but we have the comfort of knowing that no matter what challenges might cross our path in life, our financial future is secure. That comfort gives me tremendous peace of mine and more importantly, the freedom and desire to share my experience with you so you too can enjoy a higher quality of life.

In conclusion, moving through the 3 Phases of creating passive income streams can be very challenging at times, but the end result is the reward of having your money working hard for you so you can live your life’s true purpose.

We already know that not every income stream created will be successful. The key is to recognize what works and what fails and use that information moving forward to your advantage. Following the strategies above is one way to put you on the right path for success, but it’s also important to figure out what works best for you.

Picture yourself sitting with friends and family on a sunny beach without a care in the world. Is this how you want to retire? Hey, maybe the beach isn’t your thing and you want to devote your spare time to do volunteer work? Or maybe you wanna be able to stay at home and raise your kids first hand instead of someone else doing it?

Regardless of your long term goals, creating passive income isn’t always easy, but as long as you know what you want, have a plan, and stick to it, there’s nothing that can stop you from living the life of your dreams!

I hope this roadmap has helped you. If you’re already enjoying life at the higher stages, congratulations! I’ve found that the fun is in the journey, not the end result!