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Debt Snowball VS Debt Avalanche: Choosing the Right Strategy for You.

In the world full of consumer debt and a need for debt payoff strategies, there are two major strategies: the debt snowball and debt avalanche. These strategies are both great because they will help you pay off your debts much faster than just making the minimum payments alone. But, the major difference between debt snowball vs. avalanche is that one focuses on human nature and keeps us motivated and one saves you more money – it’s all about the order you pay off your debts.

There are lots of online arguments about which one is better… people have strong feelings about this kind of stuff… but the truth is they both will have a positive effect on your debt. I mean if it helps us get out of this debt then we should be all for it!

You can use either of these methods for paying off student loans, credit card debt, doctor’s bills, car notes, your mortgage, you name it, any kind of debt.

What does all this snow have to do with paying off debt? Let’s take a look at debt snowball versus debt avalanche when eliminating debt so you can figure out which works best for you.

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Debt snowball method

Dave Ramsey has made this a really popular debt payoff strategy, and his followers preach the debt snowball hard. The reason being is that debt snowball gives you some early wins that motivate you to keep going. You build momentum by focusing on your smallest debts first, then rolling those payments together to focus on larger balances.

If you haven’t read it Dave Ramsey’s The Total Money Makeover it is an excellent book that will step you through how to setup your finances and budget, using the debt snowball to get out of debt for good.

The debt snowball method aims to start with small wins and build momentum over time. Using this method, you start paying off your debt with the smallest balance first, while paying the minimum on the rest.

Here’s how the debt snowball works:

  • Every month you pay the minimum balance on all of your debts.
  • You put as much extra as possible towards your debt with the smallest balance.
  • Once your smallest debt is paid off, you move onto the next one until all of your debts are paid off.

Let’s say you have three student loans with balances of $14k, $9k and $2k. Using the snowball method, you would:

  • Focus on paying off the $2k balance, throwing as much money as possible toward this loan.
  • Pay the minimum on your $9k loan.
  • Pay the minimum on your $14k loan.

It’s important to stay in good standing with all your loans, but the goal is to prioritize the smallest balance and work up to the higher balances regardless of interest rate. In this case, after paying off the $ 2k loan, you’d then focus on the $9k loan before the $14k loan.

The upside is it helps you see results right away and get a boost of motivation. The major downside is that it often takes longer to eliminate all your debt using debt snowball versus avalanche.

Let’s look at some of the pros and cons of the debt snowball method:

Pros

  • Starting with the smallest payments first can provide quick wins and you can see it, it feels good.
  • It’s a tried-and-true method to pay off debt.
  • As you eliminate your smaller balances, you can free up extra funds to focus on the next balance.

Cons

  • It may take longer to pay off your debt.
  • You could pay more in interest over time.

The debt snowball method is a good choice if you’re dealing with some hardcore debt fatigue and need a boost of motivation. If you go this route, know that you’ll probably pay more in interest since you’re focusing on the smallest balance first rather than the interest rate.

The early satisfaction you get from paying off those smaller debts is what drives you through your debt payoff. Paying off debt can feel exhausting, so that positive feedback early on helps you from getting too fatigued.

When debt snowball can work best

If you have many different types of debt, debt snowball works best with paying off smaller amounts. Think about store credit cards, small loans or when you’ve borrowed money from friends and family.

In one Harvard Business Review study, participants that focus on the smallest balance first admit to feeling like they’re progressing more compared with other methods.

Debt avalanche method

The debt avalanche is about math and what is going to save you the most money over time.

Here’s how the debt avalanche works:

  • Every month you pay the minimum balance on all of your debts.
  • You put as much extra as possible towards your debt with the highest interest rate.
  • Once your debt with the highest interest rate is paid off, you move onto the next one until all of your debts are paid off.

The debt avalanche method requires you pay down the loan with the highest interest rate first while paying the minimum balance on the rest of your loans.

So if you have loans at 7.9%, 6.5% and 4.0%, you would work on eliminating your loan with the 7.9% interest rate first, regardless of the balance. Once you’ve paid it off, you’ll then focus on the 6.5% loan before the 4.0% loan.

Here are the pros and a con of using the debt avalanche method.

Pros

  • You save more on interest over the life of the loan.
  • You’ll pay the loans off faster.

Con

  • You may not see wins as fast as you would with debt snowball, which for some can be harder to stay motivated.

When debt avalanche works best

If you have many different kinds of the same debt, such as student loans, debt avalanche might be best for you. Having many different student loans with varying interest rates can be hard to constantly track. Paying the minimum balance every month may not be making a sizeable dent in your payoff plan.

Instead, continue making payments on all your student loans while paying as much as possible to the loan with the highest interest. Then devote that extra cash to the loan with the next-highest interest rate.

Pros and cons of debt snowball vs. avalanche

You’ve probably already gathered what I’m going to say here, but I want to give you a few key takeaways that will help you understand the difference in the snowball vs. avalanche debt payoff strategies.

  • Debt snowball empowers you with some small early victories. You see progress early on, especially if you have some pretty small debts.
  • The debt snowball will cost you more in interest charges over the course of your debt payoff.
  • The debt avalanche is better math – by focusing on loans with larger interest rates, you are saving money.
  • If you’re using the debt avalanche, it can be hard to sustain your motivation.

Which one is best?

When looking at debt snowball versus avalanche, both methods will get you to the same destination, a debt-free life!

Meadow, Away, Panorama, Mountain Hiking

Choosing the right strategy for you depends on your goals and how you’re motivated. Determine the type of saver and spender you are with some questions:

  • Do small wins help you to keep going?
  • Do you have the patience to pay off higher-interest debt to save more in the long run?

Knowing how much you could save can influence your answer. You can use an online calculator like this one from MagnifyMoney, that compares both methods to determine how much you will pay back and how long it will take to get out of debt.

Depending on your interest rates and balances, you could stand to save money and cut off some time from your repayment period by using the debt avalanche method.

But if you have a hard time paying off debt or won’t save a significant chunk of dough, debt snowball may be a good option for you.

Also, you don’t have to choose between one or the other — sometimes a combination of the methods is most effective.

Staying motivated is most important, because the worst result is giving up on you plan or sliding back into debt.

There are no right or wrong answers when it comes to debt repayment. Whether you choose debt snowball, debt avalanche, combine them somehow or choose something completely unique, the key is that you’re consistent and that you have a plan to get out of debt. Like all things personal finance, it’s PERSONAL.

The Bottom Line on Debt Snowball vs. Debt Avalanche

If you are serious about tackling your debt, then pick which method is best for your own situation and personality. The best method is the one you can stick to. If you are a person that needs more motivation to pay off debt, then stick with the debt snowball method.

There are no right or wrong answers when it comes to debt repayment. Whether you choose debt snowball, debt avalanche, some hybrid method or something completely unique, the key is that you’re consistent and that you have a plan to get out of debt.

Either way, snowball or avalanche, you are accelerating your debt payoff. That’s an awesome thing, and that means you can start focusing on other important financial goals. Like buying a first house, retirement or building up your Passive Income!

Let us know what you think in the comments below. Do you use either of these strategies? I personally started with the debt snowball to knockout the smaller credit cards. Then I went after everything else with high interest (High to Low) after I’d built the habit over 4 -6 months of paying everything extra I had toward debt pay down.

For more ideas to save money to throw strategically at your debt read:

Beginners Guide To Dividend Investing

The idea of collecting checks for the rest of your life and generating passive income can be very compelling. 

Dividend investing is a strategy that offers investors two sources of potential profit: the predictable income from regular dividend payments and capital appreciation over time. Buying dividend stocks can be a great approach for investors looking to generate income or those simply looking to build wealth by reinvesting dividend payments.

It can also be appealing for investors looking for lower-risk investments, which can often be found in dividend stocks. But like all investing there can be pitfalls along the way, and dividend stocks can be risky if you don’t know what you’re doing.

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Why invest in dividend stocks?

Whether you’re looking to generate income from dividends, which are payments a company issues to shareholders, or build long-term wealth for the future, dividend investing can be an excellent way to profit from stocks while also reducing some of the volatility that comes along with stock investing.

Let’s look at an example. Say you buy 100 shares of a company for $10 each, and that company pays a $0.35 annual dividend. You would have invested $1,000, and over the course of a year, and would have received $35 in dividend payments. That works out to a 3.5% yield, not too bad. What you choose to do with your dividends is up to you: some spending money, reinvested automatically into more of that stock or maybe a different stock. Regardless of whether the company’s stock price went up or down, you receive those dividend payments so long as the business is able to support them.

The beauty of dividend stocks is in the predictable nature of at least part of your returns, particularly if you own a diversified collection of dividend stocks across industries and risk profiles. Then you can factor regular dividends into your portfolio and choose how to best utilize them.

When you combine dividends with potential long-term capital appreciation as the companies you own grow in value, the total returns from dividend stocks can rival — and even exceed — the average returns you can expect from the rest of the stock market. Just ensure you buy established companies and don’t get too caught up in chasing the highest yield dividends, more on this later. 

The Power Of Dividends

Dividends make up a significant portion of a stock investor’s total profits in the last 50 years. Taking a look back to 1970, about 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.

Historically, dividends have proven themselves a potent source of total return in diversified investment portfolios, particularly during periods of market turbulence.

Look at the table below that shows an analysis of the prior eight decades of the performance of the stock market—that is, from 1930 to the 2000s. You can see that dividends often account for more than two-thirds of the total returns.

If investors avoided dividend-paying stocks during these periods, you can bet that they would have lost most of their overall gains. Without a doubt, dividend investing is an integral element to sustainable wealth building.

Dividend yield and other key metrics

Before buying any dividend stock, it’s important to know how to evaluate them. The following metrics will help you understand how much a stock pays, how safe it is, and whether you should avoid a particular dividend stock. For more general investing terms read: 40 Investing Terms You Need to Know

  1. Dividend yield — The dividend yield, expressed as a percentage, is the ratio that shows how much a company pays out in dividends each year relative to its stock price. For example, if a company pays $1 in annualized dividends and the stock is $10 per share, the dividend yield would be 10%. Yield is also useful as a valuation metric (for instance, by comparing a stock’s current yield to historical levels) and can be useful in identifying red flags. The key thing to note here is, while a higher yield is better, a company’s ability to maintain and grow the dividend payout matters even more.
  2. Payout ratio — The dividend as a percentage of a company’s net income. If a company earns $1 per share in net income, and pays a $0.50-per-share dividend, its payout ratio is 50%. In general terms the lower the payout ratio, the more sustainable a dividend should be. 
  3. Total return — The overall performance of a stock, the combination of dividends and gains or losses from share price change. For example, if a stock rises by 7% this year and pays a 2.5% dividend yield, its total return is 9.5%.
  4. EPS — Earnings per share, is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability. In general, a company must earn more than its dividend in order to sustain it, and this metric normalizes its results to the per-share value. The best dividend stocks are companies that have shown the ability to regularly grow earnings per share over time. Companies that consistently grow earnings per share often have strong competitive advantages. The result is a company that can keep paying its dividend and potentially increase it.
  5. P/E ratio — The price-to-earnings ratio divides a company’s share price into earnings per share. P/E ratio is a valuation metric that can be used along with dividend yield to determine if a dividend stock is fairly valued. 

High yield isn’t everything

Inexperienced dividend investors often make the mistake of looking for only the highest yields. While high-yield stocks aren’t bad, in many cases, high yields can be the result of stock price that’s fallen on expectations that the dividend will get cut, and when dividends get cut A LOT of investors get out driving the share price down as well. This is a dividend yield trap!

There are a few steps you can take to avoid falling for a yield trap:

  • Avoid buying stocks based solely on the highest yield. A company that boasts a significantly higher yield than its peers may signal trouble. 
  • Use the payout and cash payout ratios to measure a dividend’s sustainability. 
  • Use a company’s dividend history as a guide. 
  • Study the balance sheet, including debt, cash, and other assets and liabilities. 
  • Consider the business and industry itself. Is the company at risk from competitors or weak demand? Many refer to this as having an economic moat, in other words a competitive advantage that gives them staying power in the their current place in the market.

A yield that looks too good to be true, sadly, often is. It’s better to buy a dividend stock with a lower yield that’s rock solid,than chasing high yield that may crash and burn. Moreover, focusing on dividend growth, a company’s history and ability to raise the dividend, can prove more rewarding than chasing yield. 

How are dividends taxed?

Most dividend stocks pay “qualified” dividends, which, depending on your tax bracket, are taxed at a rate of 0% to 20%, significantly lower than the ordinary income tax rates of 10% to 39.6% (plus a 3.8% tax on certain investment income for the highest earners).

While most dividends qualify for the lower rates, some dividends are classified as “ordinary” dividends and are taxed at your marginal tax rate. There are several kinds of stocks that often pay above-average dividend yields that may also come with higher tax obligations because of their corporate structures. The two most common are real estate investment trusts, or REITs, and master limited partnerships, or MLPs. 

Of course, this doesn’t apply if your dividend stocks are held in a tax-advantaged retirement account such as an IRA, with the caveat that some MLPs can leave you owing taxes even in your IRA. As always refer to your accountant or other tax professional for advice on your specific investments.

Dividend investment strategies

If you’re a long-term investor looking to grow your nest egg, one of the best things to do is use a dividend reinvesting plan, usually called a DRIP. This powerful tool will take every dividend you earn, and reinvest it (at no cost) back into shares of that company. This simple set-it-and-forget-it tool is one of the easiest ways to put the power of time and compounding work in your favor. This is easier than ever with major brokers and new offering DRIP investing.

If you’re building a portfolio to generate income today and won’t be able to reinvest every dividend, the best strategy might be identifying companies that pay an acceptable yield based on your income needs, with a solid margin of safety. Use the payout ratios and their historical results as a guide, as well as other valuation measures like P/E ratio to build a diverse portfolio of dividend stocks you will be able to depend on.

A Step-By-Step Guide to Understanding Dividends

If you’re new to dividend investing or just want a refresher course, my book Beginners Guide to Dividend Investing is the perfect place to start. It explains everything from the basics of terms and dates that matter to dividend holders to the beginnings of buildings your owns dividend stock portfolio. It is a one-stop place for new investors to get a great education. Discover everything you need to know about dividends and dividend investing.

Great place to start on dividend investing for beginners. This book covers all the basics needed to begin building a long term portfolio full of healthy dividend-paying stocks.

A Final Word

Dividend investing is by far one of the best ways to use the stock market to generate passive income and to increase cash flow in your investment portfolio.

Remember that not every dividend-paying stock is useful for this purpose, and you must learn to identify the profitable ones in order to continue to build your wealth.

Before you purchase any investment, you should take the time to become familiar with exactly how it works, and its inherent risks and possible disadvantages. Or seek advice from a financial advisor for more info on that read: When to Hire a Financial Advisor.

If you learn as much as you can about the dividend investing approach before you buy your first stock, you will greatly increase your chances of benefiting from regular, long-term passive income, with as little risk as possible.

Thirty Tips for a More Frugal Lifestyle

These are the frugal living tips that helped my family go from impulse spenders to conscious consumers. 

These were the beginnings of the end of my “keeping up with the joneses” path so many people are on. Dave Ramsey sums this up well with his quote “We buy things we don’t need with money we don’t have to impress people we don’t like.”

Like most people I wasn’t naturally frugal, and still have room for improvement. The tips covered allowed my family to crush our credit card debt and go all in on our investments and building PASSIVE INCOME!

This website contains affiliate links and I will receive a commission at no additional cost to you. Thank you for your support!

What is Frugal Living?

Simply put, frugal living is spending less on things that don’t matter so you can invest greatly in those that do.

Frugality is buying the smaller home so you can afford more family trips and experiences. It’s shopping at the smaller grocery store so you can save more for retirement. And it’s saving more money in your younger years so you can retire early, with your best years yet to come.

Frugal living isn’t about being stingy, it’s about being resourceful.

It’s about finding ways to save where you can (whether via coupons, freebies or DIY hacks) so you can focus your money and attention on the things you truly value, whether that’s saving for a comfortable retirement, an early retirement, building passive income, traveling the world, or living a debt-free life.

Any number of the frugal tips below can help you achieve any of these, so read on and take action!

Simply put, frugal living is spending less on things that don’t matter so you can invest greatly in those that do  Frugal living isn’t about being stingy, it’s about being resourceful.  Like most people I wasn’t naturally frugal, and still have room for improvement. The tips covered allowed my family to crush our credit card debt and go all in on our investments and building PASSIVE INCOME!

1. Buy a reliable car in the “best” used window.

Just because a car is newer doesn’t make it safer. Unless you’re willing to spend more on maintenance and depreciation, purchase cars with a proven track record of reliability. Toyota first comes to my mind but shop around there are lots of great options.

As for a “best” used window, it’s estimated that cars lose half their value every three to five years, depending on the make and model of course. The window to buy a used car is four to ten years old.

2. Bike more.

People think they have to go all in on the cyclist lifestyle to bike to work. But just by biking to work a couple days a week can save you plenty of money over the course of a year. It also doesn’t have to be anything special, I used this Schwinn while stationed out in Hawaii.

3. Work from home.

The 4-Hour Workweek taught me that negotiating with your boss is an option, and allowed me to help a family member in need workout a more flexible AT HOME work schedule. And if you can’t work remote 100% of the time you can at least try to do part-time. Cutting down on the number of days you have to commute will make the biggest impact on your mileage and gas expense. This is especially applicable as more companies shifted with current health concerns, and the ease with all technology available today.

4. Stick to the grocery list.

A quick way to overspending on groceries is impulse buying. Make your grocery list based on your meal plan and stick to it. If you want a treat you can add it to the list beforehand but if it’s not there, avoid it.

5. Shop your pantry.

You’re not going to clear your pantry by using a spice packet here and there.  Its surprising how many people buy ingredients and come home put them up only to find out hey.. I have 4 of those already doh!

6. Have emergency meal supplies.

Some nights things don’t go as planned (That’s Life). Make sure you keep essentials for emergency meals in your pantry. Spaghetti, beans and rice, anything that will help you when you just can’t execute your meal plan. Something easy, healthy and that isn’t ordering out!

7. Buy your groceries online and pick them up.

If you still impulse buy, change how you shop. Grocery shopping online and picking up curbside can save you time, money, and temptation to impulse buy.

8. Take your lunch to work.

Sometimes going out for lunch is harder to avoid than dinner. Taking leftovers, making something the night before, or having ingredients at your desk are great options.

9. Limit grocery shopping to once per week.

You can grocery shop on Sunday and stick to your budget but if you find yourself making one or two extra stops throughout the week you budget may take a beating. “Well while I’m here I’ll just grab this too” come on you’ve said it.

10. Try generic.

If there are items you’re still buying name brand, try the generic version for a while. You may might decide to go back to buying the name brand but you also might be surprised by how good the generic version is. Try Dave Ramsey’s generic food calculations to see how much you could save on an average meal or week.

11. Use the “any item” rebates on Ibotta.

Unlike other saving apps that require you to buy brand name items, Ibotta has “any item,” “any brand,” and “any receipt” rebates so you can get cashback without compromising. If you haven’t used Ibotta before it’s worth trying and easy to earn a little money on items you are already buying every single week. For us it baby yogurt and fruits.

12. Use a dehumidifier to keep things cooler.

A dehumidifier removes humidity and makes a room feel cooler. If you struggle with a hot house in the summer, this can help run that A/C less or at least keep the thermostat set a little higher.

13. Install low flow toilets.

Flushing your toilet uses 38% of your home’s indoor water usage. When it’s time to replace your toilets go for the low flow and dual flush models.

14. Check Facebook Marketplace first.

Instead of going straight to Target or Amazon, check Facebook Marketplace first. It’s safer than Craigslist and you’ll be surprised by all the things you can find. 

15. Check out local pawn shops.

Need a small appliance and can’t find it on Facebook Marketplace? Head to a pawn shop! Pawn shops have a ton of outdoor equipment, kitchen items, electronics, etc, at great prices.

When to Hire a Financial Advisor.

Planning for your financial future all the way to retirement can be challenging. There is a near infinite amount of information to sift through, different savings accounts, investment vehicles and retirement options to consider, and so much more. It can feel almost impossible to navigate this by yourself.

What is a Financial Advisor?

A financial advisor is a qualified professional who will help you understand and reach your retirement, college savings or other personal financial goals. A good pro speaks in terms you understand and is committed to educating and empowering you to make decisions about your financial future.

A financial advisor will assist you in planning your financial future. Whether you’re saving for retirement, a home, creating an emergency fund or want to simplify your month-to-month finances to reduce expenses. Better management can help you reach goals earlier and create a plan for reducing spending and maximizing your portfolio’s efficiency.

Is is Worth it?

One of the most common questions financial advisors hear is, “Why should I hire you when all I have is a 401k and some savings?”

Vanguard, one of the world’s largest investment companies, has been examining this question for 15 years. Based on research, analysis, and testing, Vanguard has concluded that, yes, there is a quantifiable increase in return from working with a financial advisor. Vanguard calls this advantage the Advisor’s Alpha. When certain best practices are followed, the result can be an Alpha in the 3 percent per year range.

Not everyone wants or needs a financial advisor. About one-quarter of private investors are truly “self-directed,” according to Vanguard. These people enjoy investing. They obsessively follow the markets and enjoy creating and doing financial projections. Perhaps most importantly, these investors have an incredible level of discipline that prevents their emotions from intervening with their long-term investment strategy.

Finding the right financial advisor near you may seem overwhelming, but it’s not that difficult. You just need to remember a few things.

What Value can a Financial Advisor Offer?

There are several ways in which a financial advisor can add value to your investment efforts, including guidance on developing an overall investment strategy, asset allocation, minimizing taxes, re-balancing, and how to structure/time withdrawals from your retirement accounts.

But the single biggest way a financial advisor can add value—up to 1.5 percent per year of increased annual returns—is through something called behavioral coaching.

The best financial advisors are able to keep their clients’ fears and emotions in check by providing steady, fact-based advice and reassurance when the markets go crazy.

I can’t emphasize enough the importance of this function. A Vanguard study of more than 58,000 self-directed IRAs showed that investors who made material changes to their strategy EVEN ONCE in the five-year period from 2008 through 2012 suffered an 8 percent-plus hit to performance!

A Morningstar study shows that investors often receive far lower returns than the very funds they invest in. The reason: they run to funds after they have done well and ditch other funds right before they take off. In other words, they sell low and buy high. An advisor can prevent such counter-productive behaviors.

How to Choose a Financial Advisor

When evaluating a potential financial expert, you need to be prepared to ask some questions that will help you make an informed decision and choose the right advisor.

Here are 10 questions that can help you choose the best financial advisor for you:

1. Are you a fiduciary?

The answer to this question should be “yes.” Fiduciaries legally must put clients’ financial interests above their own. Not all financial advisors are fiduciaries.

2. What are your credentials?

When it comes to a financial advisor, credentials matter. Those fancy letters after the advisor’s name prove that they have dedicated a lot of time to mastering their profession.

Ideally, your financial advisor would be a CFA (Chartered Financial Analyst), CFP® (Certified Financial Planner), or PFS (Personal Financial Specialist).

3. How much experience do you have?

Your advisor should have adequate experience to wisely guide you through various life decisions and changing market conditions.

4. How are you compensated for your services?

There’s a variety of ways advisors can charge clients. Decide which payment methods you prefer, then find an advisor who uses that strategy. Will you pay an advisor a flat fee or an hourly rate? Are they fee-only or fee-based? There are several options.

5. Do you get paid by anyone other than your clients?

Fee-only advisors make money exclusively from their clients. Fee-based earn a fee based on the assets they manage for their clients, but could also sell products for a commission. There are pros and cons to each approach. But when interviewing an advisor, you should be positive they’re going to place your needs first.

6. What services do you provide?

A financial advisor may provide tax planning, college planning, life insurance, education, investment management, getting out of debt and more. Remember your potential future needs as well as your current ones.

7. Do you have any minimums?

Many advising firms require a minimum investment or minimum fee to establish a partnership. Find an advisor whose minimum is realistic for you. Many of the bigger firms go as low as 50,000. But getting in contact with them will usually result in a referral to a smaller firm is you desire

8. What is the average portfolio size that you handle?

Often the minimum portfolio size will give you a great idea, but the answer to this could tell you how much attention you will get compared to the bigger portfolios. This may not always be true but if it’s a big difference it can be possible red light.

9. How often will I hear from you? And How?

Will the firm email you weekly? Set up a phone conversation monthly? Request an annual face-to-face meeting? Ask how often you financial advisor will be in touch and how. If you know what to expect upfront, you’ll be on the same page.

10. Will you coordinate your advice with my tax situation?

Just as all financial advisors are not created equal, neither are all clients. Your advisor should take your specific needs into consideration when handling your money, especially your tax situation. Give the advisor an opportunity to talk about how they will tailor their advice to your circumstances.

Understand Their Investing Philosophy

You want a financial advisor who can clearly explain their investing philosophy. Make sure they have a long-term investing strategy that is right for you and is willing to take your opinion into account.

Another great question to ask when an advisor recommends a particular fund is: Do you personally invest in this fund yourself? If an advisor is confident enough in a fund to invest his or her own money, that can give you some confidence.

Well.. Should I Hire An Advisor?

While not everyone can afford or even benefit from the services of a financial advisor, many situations certainly warrant the help of one of these excellent providers. Investments, retirement plans, and money management, in general, can be challenging to navigate on one’s own. With the help of an experienced advisor, you can successfully make the right decisions regarding your money, therefore reducing the risk of error and ensuring that your payment is being managed responsibly and  professionally.

The Only 3 Books You Need To Retire Rich

It’s essential to start investing as soon as you can. The earlier you begin, the higher total returns you can earn. But you also have to invest wisely, which is where investing books and knowledge come into play.

Whether you’re a complete beginner, a seasoned professional, or somewhere in between, reading investing books can sharpen your knowledge and deepen your understanding of how the market works. If you’re able to learn one new thing to apply the rest of your life from each book you read on finance and investing, you will reap those rewards throughout your life and you will be sure glad you did when it comes time to retire.

These books were written with the absolute beginner in mind, covering the fundamentals of personal investing. You don’t need any prior investing knowledge or experience to understand these books, only a willingness to learn.

These will provide you the foundation required to place you far ahead of the average investor. The three combined offer actionable steps, that are simple and well laid out. Starting with building a spending plan getting rid of bad debt and investing in dependable albeit conservative investments, likely to match the broad market over the long term allowing you to retire rich. 

This website contains affiliate links and I will receive a commission at no additional cost to you. Thank you for your support!

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#1. I Will Teach You To Be Rich

Ramit Sethi, the mind behind I Will Teach You to be Rich  which is also the name of his blog — is an entrepreneur with deep understandings of psychology and personal finance. He’s released several online courses covering sales, psychology, business, personal finance and career development.

I Will Teach You to be Rich operates on the premise of you being in charge of your own life to include your finances. It’s written in a humorous and brash style that is aimed at younger investors looking to optimize their finances.

You’ll learn a lot about what drives spending, saving and investing. The book emphasizes the importance of overcoming “analysis paralysis” — the phenomenon where overthinking a situation can lead to a lack of action. He emphasizes how it is more important that you automatically invest in a good fund with low fees rather that stress out and spend all your time hunting and moving money around for that extra 0.2% when that difference isn’t going to make a significant difference.

While he recommends targets date funds that is a choice for you to decide, but index funds or target date will both get the job done with low fees and minimal effort on your part.

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#2. A Random Walk Down Wallstreet

Most proponents of the random walk theory apply it to short- and mid-term trading. They don’t argue that long-term values move unpredictably. they follow trends. However daily, weekly and even monthly stock prices have no consistent basis for prediction. We can see this in practice by looking at the graph on nearly any individual stock as of late, and look at how crazy some of the swings have been in 2020.

Random walk theory says it’s impossible to predict how a stock will move at any given time. In the short- and mid-term, a stock’s price doesn’t have any known relationship with either its historic value or the value of any other assets on the market. The lack of any known pattern means that standard investing tools like market timing and technical or fundamental analysis don’t work.

Most of the book focuses on the many ways used of analyzing the market to find an edge – and goes on to show us how they are largely junk.

This book is very easy to read with a sense a humor within all the great information, and the information itself is presented in a way that’s easily digestible.

If you have any interest in how the stock market works, you should definitely read A Random Walk Down Wall Street. It gives a very critical look at what people are always saying about the stock market – and why a most of it is rubbish. 

Of course, there are many other perspectives on the market, and the truth is that the stock market can be exploited by individuals, but that exploitation requires a lot of work, work that is simply not feasible for most people, and in many cases even professionals.  

The Bogleheads' Guide to Investing ebook by Taylor Larimore,Mel Lindauer,Michael LeBoeuf

#3. The Bogleheads Guide To Investing

The Bogleheads Guide to Investing contains investing advice based on the philosophy of the founder of Vanguard, John C. Bogle — who is also credited with creating the first index fund, a type of investment fund that tracks a particular market index.

This book was written by Taylor Larimore, a prolific reader of investing books and a big believer in Bogle’s long-term, conservative investment philosophy. 

The book starts by instructing you to get your finances in order as well as teaching you the right mindset, (which you already did if you read the first two books) From there, you cover all the basics of investing — from knowing what you’re buying, to allocating your assets, to retirement planning. 

It is a fantastic guide for investing for the long term, minimizing the costs and taxes associated with investing, and most of the basic principles of conservative investment (diversifying your portfolio widely, not betting the whole farm on stocks, and so on).

The book basically moves deliberately from the basics behind investing and what you need to get started, then moves from investment to investment, explaining the ins and outs of each and explaining the fundamentals of an overall investment philosophy.

This book offers a clear beginning to end describing an overall philosophy about what to do with your money. Many other books of this type simply provide a bunch of rules to follow; this one is rooted in the basic idea that you should be an investment conservative: low risk with growth targeting the long haul. It’s an interesting approach – and it makes for a very interesting book.

Summary

These books read and applied in this order can be extremely powerful in building real wealth in the long term. They will help you save more, smash debt,  automate where your money goes, maximize tax advantaged retirement accounts while still doing the things you love. In the end you too can retire rich!

7 First-Time Homebuyer Mistakes You Can Avoid

Many people start their home buying process without a real understanding of what it takes be a homeowner. 

In fact many of them don’t even know the upfront costs when buying a house — including a down payment, closing costs, repairs, and so many others.

They think that if they have a sizable down payment and a stable job, that its smooth sailing from here. Well, not quite…

This lack of knowledge can lead them to make costly mistakes, including paying thousands of dollars extra in loan interest, defaulting on their home loan, or going bankrupt. The following are some of the biggest mistakes made when it comes to buying a house.

1. Not Figuring Out How Much House You Can Afford

Without knowing how much house you can afford, you might waste a lot of your time and energy. You could end up looking at houses that you can’t afford yet, or not in your ideal conditions or location that you can actually afford. Your time is valuable so treat it that way.

For many first-time buyers, the goal is to buy a house and get a loan with a comfortable monthly payment that won’t keep them up at night, generally no more than 30-40% of your monthly income. Aiming lower and not trying to max what the bank says you pre-qualify for can be and effective way to build a sort of saftey net.

To avoid this mistake: Use a mortgage calculator to help you know what price range is affordable, what’s a stretch and what’s overly aggressive. And don’t forget if it’s your first time to leave a little extra breathing room for those big expenses expected with years of home ownership.

2. Getting Only One Rate Quote

Getting a loan to purchase a house is the most expensive financial decisions most people make their entire lives. So it’s important to have the best mortgage rates possible so you don’t end up paying thousands or tens of thousands of dollars extra in interest over the life of the loan. 

Yet, time and time again I see friends and family only speak with one lender when buying a home. This is a big mistake! When you speak with one lender, you don’t know what other mortgage rates are available to you. A good mortgage rate means less interest. I get 3 quotes, normally anything past 3-5 there is a smaller variation from the other loans.

Shopping for a mortgage is like shopping for a car or any other expensive item: It pays to compare offers. You or someone you know probably spends alot of time shopping for a car. But hardly spend a fraction of that when buying a home.. on something that can be more financially substantial that all the cars they buy over the life of that mortgage! According to Consumerfinance.gov, almost half of borrowers don’t shop for a loan.

To avoid this mistake: Apply with multiple mortgage lenders. A typical borrower could save hundreds in interest in the first year alone. If you’re worried about your credit score going down from all these inquiries don’t, mortgage applications made within a 45-day window will count as just one credit inquiry.

3. Not Checking Credit Reports and Correcting Errors

One of the most important things a mortgage lender looks at when deciding qualifying you for a mortgage loan is your credit score. 

Yet, many don’t know the importance of maintaining a good credit score. Lacking that fundamental knowledge could cost them a lot. One is that you will have a harder time getting qualified for the loan.

Second, even if you do qualify, you will likely get a high mortgage rate. A high mortgage rate can cost you thousands of dollars in interest – money that you could contribute towards savings, investments, and retirement.

To avoid this mistake when buying a house, first figure out your credit scores through a free monitoring service like MyFreeScoreNow. A good credit score is around 700+. 

Once you have an idea of what your credit score is through your credit report, take steps to improve it. One way to raise your credit score is not to max out your credit limit. 

Maxing out your credit cards can hurt your credit score significantly. Ideally keeping your credit utilization rate under 30 percent. 

Another way to improve your credit score is to pay your bills on time. Payment history accounts for 35% of your overall credit score making it very important to pay your bills promptly.

Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and if so at what interest rate. If your credit report contains errors, you might get quoted an interest rate that’s higher than you deserve. That’s why it pays to make sure your credit report is accurate.

To avoid this mistake: You should use your free credit report each year from all three of the main credit bureaus. You should also dispute any errors you find. 

4. Making a Down Payment That’s Too Small

A down payment on a house is arguably the most important factor when it comes to buying a house. Unless you are so wealthy that you can buy a house with outright cash, you will need to come up with a down payment. 

The recommended down payment is 20% of the home purchase price. But many first time home buyers can be qualified for a FHA loan, where the down payment is 3.5%. 

However, the disadvantage of putting less than 20% is that you will have to pay Private Mortgage Insurance (PMI). A PMI is extra fee added to your monthly mortgage payment. 

Another disadvantage is that it will take you longer to pay off your mortgage. And your monthly mortgage payments will be much more.

One way to not have to worry about a PMI is to save for a 20% down payment before starting the home buying process. Saving for a down payment should not be that hard if you have a savings strategy in place.

Related: 10 Ways to Maximize Savings in 2020

You don’t have to make a 20% down payment to buy a home. Some loan programs allow you to buy a home with zero down or 3.5% down. Sometimes that’s a good idea, but homeowners occasionally have regrets and it inherently carries more risk.

Use Mortgagecalculator.org when looking at how much of a down payment to use, balance this with how much you can afford monthly.

To avoid this mistake: A bigger down payment lets you get a smaller mortgage, giving you more affordable monthly house payments. The downside of taking the time to save more money is that home prices and mortgage rates are always changing, which means it could become more difficult to buy the home you want and you may miss out on building home equity as home values increase. The key is making sure your down payment helps you secure a payment you can comfortably make each month.

Budgets Suck. Do This Instead.

Budgeting sucks; it’s really boring and most of us never stick with it. Learn an easy way to (not) budget in only a few minutes a month.

Don’t get me wrong. I’m not saying you should just throw caution to the wind and blow your money on whatever you want. Becoming Financial Independent requires a certain amount of discipline, which means you can’t turn your expenses into a money inferno. BUT that also doesn’t mean you have to cut expenses down to the bone.

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Old-school personal finance books tell you that if you just create a budget and stick to it, then you’re all set and your money problems will be solved. But anybody who has ever tried budgeting knows it isn’t quite that simple or easy. 

In fact, only one out of every three Americans creates and follows a long term financial plan. Obviosuly budgets work for some but we will cover a different approach to manual spreadsheets, 50/30/20 , and the envelope method.

You know you should budget, but you also know you’re not really going to do it. Learning how to budget isn’t the problem, the information is out there.

You can visit any one of hundreds of personal finance blogs to read about budgeting techniques:

  • You can download free spreadsheets on countless sites
  • You can pick up one of hundreds of books
  • You can use any one of dozens of budgeting apps, many are free

Even if you track every dollar and dime you spend for 30 days… you’re still human.

Over the past 10 years in the navy, I’ve messed around a lot with my budget. I’ve set monthly budgets, annual budgets, and weekly budgets.

I’ve tracked my spending using paper and pencil, spreadsheets, and apps like Mint.com. And through this I’ve learned alot.

Tracking spending manually is pointless.

I never keep up or on top if it for very long. And I’m a financial blogger and nerd about this stuff.

Spreadsheet, Graph, Chart, Report, Theme

If I can’t do it, how can I expect you to. Monthly budgets are useless because it’s so easy to underestimate our monthly expenses.

There are some you pay for every month, such as housing, transportation, utilities, food, and debt payments.

Then there are things you pay for less often like car repairs, home improvements, trips and vacations, holiday gifts, and insurance payments. For you, these less predictable expenses may only be 10 percent or so of your total spending. But for me they’ve crept up to more like 30 percent.

And here’s what this means. Accounting for, and “pre-spending,” every dollar you make can be a financial mistake.

If you take your annual take-home pay, divide it by 12, and proceed to spend that amount every month, you’re going to be in trouble when that unexpected expensive repair comes up, or any of lifes financial curveballs comes your way. 

So what you need to do is stop obsessing over the detailed, track-every-penny budgets you’ve always been told were the solution and instead, you need to implement a simple spending plan that’s easy to set up and easy to follow. 

What is a simple spending plan?

A simple spending plan is an easy way to budget that helps you save money, get out of debt, pay your bills on time, and still allows you the freedom to spend money on things you value or keep you sane, within reason of course.

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Step 1: Track your spending automatically

Budgeting is simple: Subtract your bills from what you earn; save or spend what’s left.

Forget about manually tracking every beer, energy drink, coffee etc. The goal is to set up a system that keeps track of all of your spending electronically without any additional work from you so that you can access it as you need to.

An easy way to do this is by using the single-card method. This is when you use a single debit or credit card for all of your purchases, or as close to all of them as you can, and let technology do the tracking for you.

One of the best ways technology can help our wallets is by eliminating the need to use cash, and therefore, eliminating the need to keep track of our cash expenses. Now this is counterintuitive to what most of the old-school financial gurus say about cash helping you spend less.

Electronic payments are here, like it or not, and the number of times you need cash (for anything) over a debit or credit card are fewer and fewer. But the best thing about using a credit or debit card is that you automatically have a record of all of your spending.

So should you use credit or debit?

An age-old question. If you have a tendency to buy things first and figure out how you can pay for them later, stick to a debit card. But if you’re comfortable with a credit and only charging what you can pay back in full each month, credit cards are more useful than most debit cards for tagging and categorizing your purchases, as well as cash back and rewards that they offer.

Find the best credit cards, how to choose the best card for you, and how to use credit cards responsibly at Nerdwallet.com

If a single card isn’t for you, an alternative to the single-card method are personal finance management (PFM) tools. These applications link to your credit and debit cards, aggregate your transactions, and can even categorize them automatically.

You set spending limits, and they can send an email or text when you hit them. These apps are powerful and effective, if of course, you remember to login occasionally and make sure the categories are right, and view your spending.

But even if you don’t, that’s OK. The important thing is that data is there if you need it.

Why Pursue Financial Freedom?

What is Financial Freedom?

Financial independence is a journey, not a destination: Every day, by the choices we make, we move closer to or farther from Financial Independence. While there are some important milestones along the way (e.g., building an emergency fund, paying off all non-mortgage debt, retirement), these signs mark progress, not the finish line.

Some view Financial Independence as the point where one can live off of savings, a pension, social security, and the like. While the ability to live without the need of a 9 to 5 job is an important step toward Financial Independence, it doesn’t automatically make somebody financially independent. The problem is, we all know of people who are retired but are just getting by and, because of limited financial resources, are not living life as they choose.

Financial independence is not “one size fits all”: What I want or need to live life as I choose may be very different from what you want or need to live life as you choose.

What are You Working For?

You go to work for five days (or more) a week for 40 hours (or more). Even if you love your job, it’s time away from the other things you love, your family, your friends, your hobbies. We want to use the money we work so hard for to pay for our freedom. So, what are our financial goals and how do we achieve financial freedom?

Most of us will spend our entire lives doing hard work to make ends meet. And for what? A house bigger than you really need or can afford full of stuff you never use and don’t even remember buying?

Related: 10 Reasons You’re Still Poor

To pay off credit cards that you charged that house full of stuff to?

For the occasional vacation that you can’t really afford and your boss gives you a hard time about taking?

For the status that driving a Lexus and wearing expensive clothes gives you?

Dave Ramsey says it simply “We buy things we don’t need with money we don’t have to impress people we don’t like.”

Maybe you realize it and maybe you don’t but you’re in debtor’s prison and you don’t have much freedom.

What Can Money Buy?

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When people dream about having money, it’s often the things they would buy that they fantasize about. But material things are not the best part of having money, not even if you have a garage full of Sports cars, lifted trucks, and any fun expensive grown up toys you can think to put in there.

Money can buy choices and choices mean freedom.

Do you hate your job? You can quit and take your time finding a better one.

In an unhappy relationship? Hate the town you live in? 

You don’t have to stay, you can take your money and leave.

Money can buy convenience.

Are you too tired to make dinner? Order out.

Don’t you have time to clean your house? Hire a cleaning service.

You’ve been told to evacuate because of a hurricane? Woo! You’re not going to sit in a flooded house with no electricity for a week. You’re going on a impromtu vacation, which sounds kinda exciting.

Money can buy time. 

You had a baby and you don’t want to go back to work? You’re a stay at home parent now.

Is your sister having a destination wedding in somewhere remote? Excellent, pack your bags.

A family member had surgery and needs you to stay with her for a few weeks? Cancel your appointments, you’re going to be out of town.

All of these examples are examples of having control over your own life, not feeling trapped. When we feel like we’re trapped and we don’t have choices, we feel unhappy and anxious.

Money can buy happiness.

We feel happy when we have control over our own lives. Money can also buy happiness if you know what to buy. Too many people think buying things brings happiness. And it does, but it’s very temporary and usually, the happiness extends only to you.

If you want to spend money to get happy, spend it on experiences. It’s been proven that experiences make us happier than material possessions. And it’s not hard to think of an example from your own life.

Experiences, rather than things, make us happy. And the even better thing about experiences versus things is that you can have all sorts of wonderful experiences for free.

It doesn’t cost anything to take your kid to the park or to go hiking with a group of friends. It doesn’t cost anything to spend the evening making dinner with your partner.

10 Reasons You’re Still Poor

If you ever find yourself asking “why am I broke?” then odds are you’re falling into one of the 10 pitfalls discussed below. Fix a couple of these and you will be able to find a little extra wiggle room in your budget at the end of each month.

You have a job but your paychecks never seem to stretch as far as you think they should and ends never quite seem to meet. You know you should be saving more and spending less, yet you never manage to do either. You’re hoping your financial fortunes will somehow turn around. In the meantime, the debts keep piling up. Sound familiar?

Instead of waiting for your situation to magically improve, it’s time to take a hard look at all the things you’re doing that are contributing to your financial troubles. That’s right: It might actually be your own fault that you have no money. 

 A few will probably look very familiar to you. Follow this advice for fixing your finances and you should be able to dig yourself out of your hole.

No Money, Jeans, Money, Wallet, Poverty

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#1: You Slave Away for a Paycheck

Other than working for commissions or investment banking, where you can leverage company assessts, if you really want to get ahead in life you have to own your own business. I am not saying that you need to quit your job immediately. You need to have the right mindset in order to start your own successful business without quitting your job, or having to put up a lot of money.

At some point, if you want to be wealthy you have to get your own business. Otherwise you will continue to spend all your time making someone else rich.

#2: You Painfully Ignore the Power of Interest

So you were young and dumb and maxed out a credit card because you were desperate. This is not an uncommon occurrence. But that singular decision can have a lasting impact.

Sure missing a payment lowers your credit score, making it harder to get a car loan or that mortgage you’ve been hoping for…everyone knows that.

But that’s not the only the only problem — it’s the crushing interest payments that you didn’t take into consideration. If you send in just the monthly minimum (2% of the balance) on a credit card with a $5,000 balance and 15% interest rate, it will take 32 years to get rid the debt, and you will pay nearly $8,000 in interest on the original $5,000 balance.

#3: Car Poor

What keeps most people from financial freedom? What keeps people from having a solid retirement fund? What keeps Americans poor? It’s not lattes and impulse buys, it’s way too often car payments.

$500/month, invested at an 8% interest rate, over an entire typical adult lifetime, would be over $2 million, but people would rather have a nice car than money. And I get it, you want a nice car, but there are ways to save and wait until you can actually afford a nice car. If you have to finance it, you can’t afford it.

A good rule of thumb is to pay no more than 5x your monthly salary for a vehicle. Figure out that amount, and save first, then buy once you have the money. The idea is to make car payments to yourself in an interest-bearing account, instead of making car payments to a company and paying interest.

If you can break free of the mindset that says “you should care what other people think” or “you deserve a nice car,” you’ll be one step closer to financial freedom!

#4: Unsuccessful People Try to Reinvent the Wheel

Poor people always try to come up with something spectacular and new to make their fortune. This is the biggest trap you face as you work toward your goals. Instead of something new, what you need is a proven system, one that you know works and will help you gain success.

Caveman, Primeval, Primitive, Man

Warren Buffet once said, “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

What is the system that you have in place? Are you trying to reinvent the wheel or do you have one that is proven?

#5: Controlled by Fear

Fear is a natural component of the business world. If the path to success were clear-cut and infallible, then everyone would be wealthy. Because it isn’t, everyone must deal with situations that make them anxious. There are three different ways to process and manage fear: The first two options will destroy your chances for a successful and healthy life, while the third gives you the mindset you need to use fear to your advantage.

1) Some people pretend that fear does not exist. The people who manage fear through ignoring it end up in a life filled with poverty and misery. By ignoring fear, you let it control you because you neither acknowledge it nor learn how to deal with it. Unacknowledged fear renders you impotent in your efforts to reach your goals, and this is the most disempowered state for wealth and success.

2) Other people act in spite of fear. This way of dealing with fear allows you to achieve certain goals despite being afraid; however, it leads you to anxiety. Yes, you will have wealth, but you will constantly be afraid of taking the wrong step. These people are hung up on worries like “What if I fail?” and “What if I don’t hit my goal?” This results in a situation where you second-guess every decision and live in fear of failure.

3) Successful people embrace fear and let it motivate them. These people achieve their goals and do so by acknowledging their fear without letting it ruin their enjoyment of their success.

7 Passive Income Ideas For Increased Cash Flow

How Passive Income Works

Passive income is any money you earn on a regular basis that doesn’t come from a job. In some cases, passive income is money you get from a project or investment that you put money or time into at the start. For example, if you own part of a business but are not actively involved in running that business, your cut of the profits is passive income.

You can also earn passive income from a project that you’ve invested your time in, rather than your money. For instance, if you spend a year writing a book the royalty payments you get from that book’s sales are a form of passive income.

Having a source of income that doesn’t require the day to day grind can offer some unique benefits including :

  • Extra Cash. When you’re short of money, financial experts usually advise you to respond by tightening your belt. Little luxuries, such as a daily latte or cable TV, are usually the first expenses to be slashed from the budget in an effort to make ends meet. But if you can find a way to supplement your regular paycheck with a passive income stream, the extra income can allow you to enjoy these simple pleasures again without going into debt.
focus photography of person counting dollar banknotes
  • A Cushion for Emergencies. Many Americans live paycheck to paycheck, with no savings to fall back on in an emergency. The Federal Reserve’s annual report on the economic health of households  found that 47% of Americans couldn’t easily come up with an extra $400 to cover an unexpected expense, such as a car repair or a trip to the emergency room. A passive income stream could give you the extra cash needed to build up an emergency fund without having to cut back on your current spending.
  • More Job Flexibility. When your job is your only source of income, you’re dependent on it. You’ll put up with unpleasant working conditions or unreasonable demands from a boss, because giving up your job would leave you with nothing to live on. But if you have some passive income to fall back on, you can afford to be a little picky in your selection. If you don’t like your current job, you can afford to ditch it for a new one that pays less, eking out your lower paycheck with passive income. And if you lose your job altogether, you’ll still have at least a little income to hold you over until you find a new one.
  • Extra Money in Retirement. The vast majority of Americans aren’t putting aside enough money to support themselves comfortably in retirement. If you’re in this position, you could one day find yourself with no income except for Social Security, which was never designed to be a family’s sole source of support – and which might have to cut its benefit levels still further before you reach retirement age. But if you do the work now to create a passive income stream, you’ll have some additional money coming in (in addition to Social Security checks) after you retire.
  • An Earlier Retirement. If you can earn enough passive income – from one stream or, better yet, from several – it can replace your paycheck altogether, making you financially independent. This would give you the option of retiring early, or perhaps quitting your current job and taking up a new career that interests you. Making this much money solely from passive income doesn’t happen overnight – but it is possible.

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Ways to Earn Passive Income

When you see the phrase “passive income” in an article, it’s often referring to money earned from passive income investments, such as dividend-yielding stocks or real estate. However, investing is one of many ways to earn income when you’re not working. There are a variety of other ways to set up a passive income stream by putting in an initial investment of time, money, or both – and there are even a few that don’t take very much of either.

1. Real Estate 

One of the best-known ways to earn passive income is through real estate. Renting out a building can bring in a tidy sum of money each month, with little work in some cases – but it can also require a big chunk of cash up front to buy the property. There are also low and no money down options but these can bring on more risk, and many people recommend the traditional route when first getting started.

Though it can take a while to build up enough cash to put a 20% down payment on an investment property (the typical lender minimum), they can snowball fairly quickly. The key here is to correctly project income and expenses in order to calculate cash flow. However you have to be sure to include the cost of a property manager in your calculations unless you want to manage the property yourself. Even with a property manager, you may be required to make large repair decisions every now and then – so while this is not a 100% passive activity there are completely passive options with real estate investing.

Many buy and hold investors (ie rental property investors) take that excess cash flow and put it toward their next down payment. This allows them to slowly amass portfolios of dozens and sometimes hundreds of rental properties.

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Investing in real estate can be very profitable and mostly passive. However, a lot of people don’t want to deal with owning a physical property where they need to deal with tenants and property mangers.

Another option for passively investing in real estate is through a real estate investment trust (REIT). REIT’s own multiple real estate properties and allow investors to invest in the portfolio. The great thing about an REIT is that there is a 90% distribution rule. Each REIT is required to pay out 90% of their net income as a dividend to investors.

One of my favorite places to invest in REIT’s is through Fundrise. They have a historical return of 8.7 – 12.4%. Plus, you can invest with as little as $500.

Related: Best Real Estate Crowdfunding Platforms for Passive Income

Investing in REIT stocks can also be a great way to make passive income. It requires an upfront investment, but once you’ve done your research and found solid companies with high dividend yields, you can sit back and collect the dividend checks (or reinvest the dividend earnings).

Related: How to Passively Invest in Real Estate

2. Residual Sales Income

Typically, when you work in sales, you earn your money in the form of commissions. Every time you sell a product or a service, you are paid a percentage of the money paid by the customer. With some types of sales jobs, however, you don’t just earn a single commission when you make a sale – you also receive ongoing residual payments from sales you’ve made in the past. This type of residual income that can last for years after the original purchase.

Products and services that sometimes pay their salespeople this way include:

  • Insurance. Say you’re an insurance salesperson who has just sold a 10-year term life insurance policy. You earn a one-time commission for making the sale, but you also earn a percentage of the monthly premium every time the buyer pays it. So long as the insured keeps making those monthly payments, you can keep collecting residuals off that one sale for up to 10 years.
  • Financial Products. Certain types of financial products, such as annuities, also pay ongoing commissions to the professionals who sell them. Financial advisor Ethan Braid of High Pass Asset Management writes that when he sells a $500,000 annuity, he not only earns a 7% commission, or $35,000, immediately – but on top of that, he gets a 1% “trailer commission,” or $5,000, every year the buyer owns the annuity. So a financial advisor who has sold 10 annuities that are still active could bring in an income of $50,000 a year just from these trailer commissions.
  • Service Contracts. It is sometimes possible to earn residuals for products or services with pay-as-you-go contracts, such as home security services. If a client signs a contract to have his or her home monitored for a monthly fee, the salesperson can receive a residual payment each month the client pays for this service. Furthermore, agreements often pay monthly residuals to sales employees. For example, alarm companies selling ongoing home or business monitoring for a monthly fee may offer residual income to those who sell this service.

No type of sales job can be considered truly passive. In fact, sales can be more active than most jobs, since your pay often depends on how much you sell, and it takes plenty of hustle to bring new customers on board. However, if you’re already working in sales, or considering it as a career, it could be useful to focus on products that can bring in residual income in addition to the usual commission. That way, you can continue earning money on work you’ve already done.