Close your eyes and imagine what your life would be like if you didn’t have to work, if each day you woke up and had the choice on how to spend that day.
Would you continue working the job you currently have? Would you stop working altogether to travel the world? Would you have the time to volunteer for the cause that’s near and dear to your heart? Does your work fulfill you to the point that you would do it even if money wasn’t an issue?
There are no right or wrong answers, as defining your WHY is a personal and imperative step to financial freedom.
As I navigated through the early years of life with three kids, I knew that I couldn’t keep moving at the same work/life pace that I had been going at for years. My oldest son had turned 4 only a couple of weeks before my youngest was born.
Needless to say, it was a crazy time of life, and my husband and I were barely keeping our heads above water.
I knew there had to be a better way out there, where I could have financial security and certainty while also spending time with my children. This feeling of unease at missing so many moments in their lives was building.
The Moment I Realized I Needed To Quit My Job
After one particularly long weekend where I had photographed family portraits Friday evening and then headed into back to back full day weddings on Saturday and Sunday, all I wanted to do was spend time with my kids on Monday.
However, off to school and daycare they went, and after being away all weekend, I was left without them during the week. It was at that moment I realized I needed to finally make a change.
On top of having all of my income come from active pursuits through my photography business, the most challenging part of making this change was that I absolutely loved photography and creating those lasting memories for my clients.
However, I knew that if I didn’t get back in control of the time spent, my kids’ childhoods would slip right past me.
I decided that I needed to find the perfect sweet spot where I could financially support my family while also being completely present with them. Enter passive income!
Finding A Way To Make Money While You Sleep
The first step I knew I needed to make was to find a way to make money without actively being “at work.” The quote from Warren Buffett rang in my head: “If you don’t find a way to make money while you sleep, you will work until you die.”
As the old adage from Andrew Carnegie sums up, “Ninety percent of all millionaires become so through owning real estate.”
I began looking into options in the real estate world; mainly the option of buying out of state rentals (I live in expensive California) and utilizing the BRRRR method (buy, rehab, rent out, refinance, repeat).
However, I wasn’t looking to trade one busy full time work schedule for another. The point of this was to earn income while sleeping (even though with small children it wasn’t something I was doing much of at the time).
And the thought of actively running a business of out of state rentals – on top of carpools, playdates, laundry, meal prep, and more – seemed way too time consuming and much more work than I wanted.
Discovering The Concept Of Passive Real Estate Investing
Enter the concept of real estate syndications, which I soon discovered was the golden ticket to creating truly passive income.
After coming across a Facebook post from Goodegg co-founder and CEO Julie Lam, which originally introduced me to Goodegg Investments, it seemed too good to be true.
An investment vehicle that would allow me to scale back on my active work while also spending more time with my kids? A way to literally earn passive income while I slept…or traveled or took my kids to a playdate or got much needed self care time.
Yes – it was true, and I couldn’t wait to dive in.
In this article, we’ll dive into the steps you can take to move toward finding your freedom number, starting with making a budget, sticking to it, and reining in your expenses, all so you can find the best way for you to replace your active income with passive income.
Here are the steps we’ll cover in this article…
- Setting up a budget and learning how to stick to it
- Finding your freedom number
- How to get started with creating passive income
- Choosing the right investments that align with your investing goals
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Step #1 – Set Up A Budget For Your Monthly Expenses
Money in, money out. The first step to knowing how and where to invest your money is knowing what money you’re bringing in and what money you’re spending each month. Without this valuable information, you’ll be missing the baseline of what you’ll need in passive income to replace your active income while accounting for your expenses.
Remember that moment from earlier when you closed your eyes and imagined what your life would be like if you didn’t have to work? Go back to that moment in your mind. Now that you’ve got that clear picture it becomes easier to figure out how to achieve it, right?
Budgeting is such a critical step in achieving that goal because having that clear picture of where you want to be, starts with knowing where you’re currently at.
Let’s say your goal is to live your exact same life just without actively working everyday. To know how you’ll achieve that goal financially, you need to know how much passive income you need to pay for that lifestyle.
To know how much passive income you need, you have to start with what that lifestyle costs you and how much money you bring in every month, which is what you’ll need to replace. Arming yourself with this knowledge is such a critical first step in getting started on your financial goals.
There are a lot of great budgeting apps out there to help you either get started with a basic budget or to help you maintain your budgeting. We’ll list out a few of the options here to consider. The most important step though, no matter which app or good ol’ pen and paper method you use, is that you follow through.
Methods of Budgeting
#1 – Mint
Let’s start with Mint, as it has very high ratings in both the App Store and Google Play. (It also has, by far, more reviews than any other app mentioned here.) It’s free and syncs many kinds of accounts: checking and savings, credit cards, loans, investments and bills.
As far as the actual budgeting, Mint tracks your expenses and places them in budget categories. You can personalize these categories, which are unlimited. You set limits for these categories, and Mint lets you know if you’re approaching those limits.
Besides those budgeting features, Mint can help you pay down debt, save more money, and track goals. The app also shows you your credit score and net worth.
Bonus: Mint provides tons of support for using the app, including a detailed FAQ.
Mint is impressive in many ways, including the fact that it tracks just about everything on your behalf. But that may not be ideal if you’re looking to be more actively hands-on in your budgeting.
If you’re searching for an app in which you plan ahead for your money, rather than track it after the fact, other apps may work better for you.
#2 – You Need A Budget
You Need A Budget, or YNAB, is designed so that you can plan ahead for your financial decisions, rather than track past transactions. YNAB follows the zero-based budgeting system, which has you make a plan for every dollar you earn.
As soon as you get paid, you tell YNAB how much of your income should go toward various categories, including expenses, goals, and savings. The idea is that you become more intentional with your money when you’re prompted to actively decide what to do with it.
With all this decision-making, YNAB is about as hands-on as you can get. To help you trek up that learning curve, YNAB’s website offers many educational resources describing exactly how to budget and use the app.
To really gain the benefit from You Need A Budget, you have to be committed to keeping up with it. By design, it works best for users who want to get hands-on while planning for their spending, saving, and investing goals. One last drawback to this option is its price is high compared to some of the other apps with similar features.
#3 – Personal Capital
Personal Capital is primarily an investment tool, but its free app includes features helpful for budgeters looking to track their spending. You can connect and monitor checking, savings and credit card accounts, as well as IRAs, 401(k)s, mortgages and loans.
The app provides a spending snapshot by listing recent transactions by category. You can customize those categories and see the percentage of total monthly spending each category represents.
Personal Capital also serves up a net worth and portfolio tracker, which can be helpful for investors who want that level of transparency.
Something to consider though, is if your goal is to plan out your spending and saving, you may want to go another route. This app’s budgeting features are why I mention it here, but its investment tools are what make it unique. Other apps have more in-the-weeds budgeting capabilities, if that’s what you’re looking for.
#4 – Pen and Paper
Some of us are old school and still want to bust out that good ol’ pen and paper. The important part to keep in mind with any of these options is that your follow through is the most important part. You can track on a pad of paper, on a spreadsheet, or something similar.
Now that you know what your monthly expenses are and you’re tracking them month over month to ensure accuracy, you can really start to look at your spending.
Knowing what you’re spending each month is key to knowing how much you would need each month to pay your bills without actively working. Now that you have your budget in place, and you’re sticking to it, you can move on to the next step – finding your freedom number.
Step #2 – Finding Your Freedom Number
Sounds exciting right? Freedom number has a great ring to it, and it’s even better in reality. This step is so important in moving the needle in your journey to living your life by design.
What Is A Freedom Number?
Some of you may have never heard about this concept before, so we’ll break it down for you. Your freedom number is the amount of passive income you need to fully satisfy your living expenses.
Once you create enough passive income to reach or surpass your freedom number, you no longer need to actively work. You will be living off your passive income and will have the choice of whether you want to continue working, quit your job to travel the world, stay home with your kids, or focus on a passion project.
Calculating YOUR Freedom Number
Calculating your freedom number is easy. It is the average amount you spend on a monthly basis.
If you’ve put together your budget using one of the methods listed above, this will take as little as 10 minutes. If not, you may need to spend a couple of hours pulling together records of your various spending outlets. Either way, the time invested here is well worth it.
Here are the steps to calculate your freedom number:
- Figure out how much you spend on a monthly basis. Look back at all of your spending mediums for the last 12 months—including bank statements, credit card statements, debt payments, charity donations, etc.—and try to remember any cash transactions as well. Use one of the budgeting apps we discussed in the previous section to make this step quick and easy.
- Put them all into a single spreadsheet. Aggregate all of the transactions you have made in the last 12 months into a single spreadsheet or any method that will allow you to see the final number.
- Divide by 12. Take the sum of all of the transactions you have made in the past 12 months and divide it by 12. Assuming no drastic life changes, this is your average monthly spending, otherwise known as your freedom number. Once your passive income surpasses this amount, you are free!
Freedom Number Example
Let’s walk through an example. Let’s assume Suzy Smith looks back at all of her transactions over the past year and determines that she spends approximately $5,000 each month.
Once her passive investments generate $5,000 per month, she is “free,” meaning she no longer needs the income from her job to cover the cost of her living expenses.
What your freedom number does is give you the CHOICE in your next steps. Once you figure out your freedom number and achieve that through passive income, you become “free.” Being “free” means you can live your current lifestyle, exactly how it is, without working.
If you make a choice to change your current lifestyle, you may need to increase your passive income by the additional amount you need for that new lifestyle.
For example, if Suzy wanted to live a lavish lifestyle spending $10,000 a month without working, then she would need to increase her passive income to that amount in order to sustain that new lifestyle without having to work.
If you love what you do for work and want to keep your full-time job, great! In that case, creating passive income may not be as much about quitting your job as it is about creating another stream of income and a safety net, to give you another avenue in case you choose to quit your job down the road or aren’t able to continue working.
Once you figure out your freedom number, it’s time to dive into the next step – learning about passive investments and what strategy will help you earn the passive income needed to live a meaningful and intentional life by design.
Step #3 – Get Started With Passive Income
Passive income is such a buzzword these days. It seems it’s become a token idea that someone just hands you money. And in reality, if you set it up the right way, it can really be that easy, when you’ve taken the proper steps toward making sure your investments are truly passive.
Let’s break down exactly what a passive income stream is. Spending hours making YouTube content is NOT passive income. A side hustle that is a “hustle” of your time and energy is not passive, at least not when you’re grinding to build it out.
A rental property that takes more of your time to manage than your actual day job is also not passive income. These are examples of ACTIVE income and so beware of falling into the trap of reading or being told they are passive income streams.
To have truly passive income, it should feel as easy as someone depositing money into your bank account without you having to do anything
What Is Passive Income?
Now that we’ve talked about a few of the things that are NOT passive income, let’s break down options that ARE.
Limited Partner In A Real Estate Syndication
This is our favorite path to creating passive income. As an LP (limited partner) in a real estate syndication, after your initial due diligence, your income from the investment is truly as passive as it comes.
The operators will send monthly updates about how the business plan is coming along at the property, and you’ll be enjoying your monthly or quarterly distributions showing up in your bank account.
Dividend Stocks/Bonds/High Yield Savings Account
These are grouped together because they all earn passive income on the same basic principle.
Interest is paid out to you during the time period your money is invested in each. The exact percentage will change based on the investment itself.
Rental Properties (Sometimes)
A rental property can be a great source of passive income IF it’s being completely managed by someone else (with all the fees associated with that) and it’s still a cash flowing property.
If you have a hand in the day-to-day operation, or even monthly dealings, then this is NOT passive income, it is active income.
Rent Out Your Spare Room / Car / Home
Got a spare room in your home that you’re not using? Live in a city with a car that just sits parked in front of your house? Does your home sit empty quite often while you travel?
Consider renting out these items in a peer-to-peer app to earn money easily. As long as you own these things outright or have low payments and you’re able to manage the rental process without too much time spent, then you’ve found a great passive income source.
These are just a few of the options out there to earn passive income. You can choose to focus on just one of these or employ a few to work toward your freedom number. Once you’ve gotten started with passive investments, you’ll see the power of having your money work for you!
How To Get Started Earning Passive Income
Now that you’ve learned a few options for earning passive income, the next step is to start the implementation. That’s the fun part!
The amount needed to start will depend on what avenue you explore. For stocks or bonds, those don’t have a minimum amount required to deposit. Just open an account and get started. To purchase a cash-flowing rental property or invest in a real estate syndication, you’ll need a minimum amount of capital to begin with.
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Step #4 – Choosing The Right Investment That Aligns With Your Investing Goals
Choosing which option will work best for you comes down to your personal investing goals and where you are in your journey.
If you’re in your 20s or 30s and have time on your side, you can afford to take on a little more risk and potentially try different options if something doesn’t work right away.
You could invest in a rental property and try your hand at being a landlord. You could utilize the peer-to-peer economy by renting out space in your home. Spending a bit of time, you could create content for YouTube in the hopes of creating evergreen content that will eventually bring in passive income.
If you’ve saved up a fair bit of capital, you could also consider investing passively in real estate syndications as a great way to create passive income to offset your active income early in your career.
If you’re closer to retirement age, then you may want to consider strategies with lower or more moderate risk factors, including certain real estate syndications, stocks, bonds or high yield savings accounts.
At any age or stage, investing in a real estate syndication can be a great investment. The benefits are powerful no matter what part of the journey you’re in but especially if you are looking to invest across a 5 to 10 year horizon.
Case Study – Investing $200k in a Real Estate Syndication
Let’s say you have $200k to invest right now, and that you choose to invest it into a multifamily real estate syndication.
Let’s say that the investment comes with a preferred return of 7% per year. That means that, for the $200k investment, you would likely generate around $14,000 in passive income per year, or about $1,167 per month.
$200,000 initial investment x 7% preferred return per year / 12 months = $1,167 / month in passive income
Now most likely, your freedom number is more than $1,167 per month, but this will give you a good starting point.
Finding your freedom number and reaching that level via passive income is a rewarding process, but it does take some time to attain it.
Let’s say your freedom number is closer to $5,000 per month. That means you would need approximately $850k at a preferred return of 7% to generate roughly $5,000 per month.
$850,000 initial investment x 7% preferred return per year / 12 months = $4,958 / month in passive income
Of course, once you factor in the proceeds from the sale of the asset in 3 to 5 years’ time, that can significantly boost your returns and thus give you a more sizable nest egg to invest into the next deal.
Let’s break down the math over 10 years.
Initial investment
$200,000
Amount at the 5-year mark (assuming a 2x equity multiple upon deal exit)
$200,000 initial investment + $200,000 returns (cash flow + proceeds from sale) = $400,000
Amount at the 10-year mark (assuming a 2x equity multiple upon deal exit)
$400,000 initial investment + $400,000 returns (cash flow + proceeds from sale) = $800,000
At that 10-year mark, if you were to reinvest the full $800,000 into another real estate syndication at a 7% annual cash-on-cash return, you would receive approximately $4,667 per month in cash flow distributions, which would be most of the way to that $5,000 target.
Key Takeaways
When it comes to planning for your future, there’s no one size fits all for these decisions, and you have to find the path that’s right for you and your family. Before we wrap, let’s review each of the options we covered in a nutshell.
Step #1 – Start And Stick To A Budget
To start off, you need to know how much money you have coming in and how much money you have going out. Creating a solid budget is one of the first and most important steps to take to start off on the right foot with moving toward financial independence.
There are a lot of apps out there that can help you with budgeting. Choose one that you’ll be likely to stick with.
Step #2 – Find Your Freedom Number
You have to know what that magical number is, the number that you need to pay your monthly expenses – your Freedom Number – before you can start figuring out how to replace that amount with passive income.
Once you’ve calculated your freedom number, you can then make a choice as to how you want to spend your time. That choice can be to keep working your dream job or it could be to stick with those monthly expenses and stop working your day job so you can spend more time with your family. Either way, the choice can now be yours!
Step #3 – Get Started With Passive Income
Passive income is a powerful tool to be able to replace your active income, which means you’re actively working for each dollar you make. With passive income, that money can come to you while you’re sleeping!
Step #4 – Choosing The Right Investment
Choosing which option will work best for you comes down to your personal investing goals and where you are in your journey.
Find the strategy that works for you given your stage in life and your investing journey. Real estate syndications can be such a great way to protect and grow your money year after year.
Next Steps
Given everything we just walked through, it’s completely normal if your head feels like it’s about to explode.
No matter what you decide to do, you’re taking the most important first step in educating yourself on the possibilities. There are more options out there than you think and with just a little bit of time spent, you can find the best fit for your family.
Here at Goodegg Investments, we have a variety of options for you to help you learn about and invest in real estate so you can take advantage of the cash flow, equity, appreciation, and tax benefits. Below are a few resources to get you started.
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If you’re not yet ready to invest but are curious about how all of this works, we invite you to dip your toe in the water with us through our free 7-day email course – Passive Real Estate Investing 101 – or to get a free hardcover copy of our book – Investing For Good.
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If there’s ever anything we can do to help you on your journey, feel free to email us at [email protected] or call / text us at (888) 830-1450.
