This is the second post in a series on American PI:E™ – the recipe for early retirement, true autonomy, and reclaiming your American dream.
To jump into action, let’s recall our formula for financial autonomy: PI:E ≥ 1:1
Simply put – if our passive income is greater than or equal to our expenses, we have autonomy, or the ability to basically choose what we do with our time.
The Left Side of the Equation
Bruce Wayne and Passive Income
Our mission: to generate income, preferably passive, but active is often initially needed to get there. Active income is what we think of as working the traditional 9-5 pm – it requires your material involvement and directly correlates time to income. Active workers with entrepreneurial spirits can begin to break away from this model by embracing side-hustles and growing to a point where side-income eventually overtakes their primary source of income, or their job.
Passive income doesn’t require a direct correlation of time and can be from investments in stocks, bonds, mutual funds, and real estate. It can also be obtained via ownership of a company, but in order to be truly passive, you should not be materially involved in the day-to-day operations of the enterprise.
For example: While Bruce Wayne is actively being Batman, Wayne Enterprises operates under someone else’s management and passively generates income for Bruce to live in a mansion and build high-tech crime-fighting gear.
For most people, passive income is the end-goal of investing for retirement. Financial advisers spend much of their time with clients attempting to get them to a 1:1 PI:E ratio (although they might not call it that) so that they can retire without having to continue working.
Geese and Golden Eggs
If passive income each month is the golden egg, we want to make sure we have raised a goose (or geese) that can keep producing!
Here are some examples of passive income geese:
- Investment portfolio – can be done via employer-sponsored plans, online brokerage services, or active-management firms. Investing by itself is not the goal. It is a means to an end, and that end is to generate passive income so you can stop having to actively work for it. Dividend investing and fixed-income investing (bonds) are popular methods for generating income from principal investments (nest-eggs).
- Real estate – some invest in rental units, some flip. Flipping is more of an active pursuit, unless you build a flipping company run by someone else that uses a model you have established. Remember, Bruce Wayne doesn’t run Wayne Enterprises, he has Lucius Fox do the active work. In some models, real-estate agents can build sustainable teams and relinquish daily control to the manager of the team, effectively accomplishing the same goal.
- Enterprise – Building a business, company, or practice that can ultimately operate and generate revenue (and profit) without you actively participating. Many entrepreneurs build businesses with the goal to sell them down the road for a windfall, which they can then take to spend, give, or invest in another venture, investments, or real estate.
- Benefits – From government (social security, disability) or from employers (pensions, less common nowadays).
Remember the story of the goose and golden egg: the owner of the goose gets impatient and wants all of the golden eggs at once, so he kills the goose (yikes) and cuts it open (gross) to find, you guessed it, no eggs.
Income’s gotta come from somewhere – if you never create passive income streams, you’ll always be the goose. Nurture your golden goose, feed it over time, and eventually it will give you the golden egg of autonomy you’ve been waiting for.
This autonomy gives us the freedom to choose what we wish to do with our time, even if it means fighting crime in spandex and a cape.
Up next: The Right Side – Expenses (how much do our dreams cost?)