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Finally, the Easiest Source of Passive Income Revealed

June 26, 2017 By The Money Wizard 21 Comments

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easiest source of passive income

Now if that clickbait didn’t get you to read the article, I don’t know what will.

Hear me out though, because this one delivers the passive income goods. It’s just not what most people expect.

After all, a lot is made of passive income. According to any hopeful investor or retiree, it’s the holy grail of the investment world.

If you’re an entrepreneur, you’re hoping to build up enough passive income to make Shark Tank proud.

If you’re a shop-a-holic, you’re hoping to build up enough passive income to buy a lifetime supply of $95,000 fur coats without letting a work schedule get in the way of your 160 shopping trips per year.

And if you’re an aspiring early retiree, you’re working like a CEO and saving like a student in the hopes of one day (in the not too distant future, ideally) building up enough passive income to support your lifestyle. Once you have, you’re free to give work the middle finger, let it linger, and then preferably tell your boss something that will make for an epic story of F-U money.

The sad truth though? It’s is hard to build up the sources of passive income. Damn hard.

Apart from the frustrating obstacle of having to build up a huge chunk of savings, once you get those savings there’s only so many options that are actually passive.

  • Starting a business? Ha, say good-bye to your weekends. Not really passive.
  • Buying an investment property? DIY gutter installations, tenant evictions, and clogged toilets doesn’t exactly fit the definition of passive either.
  • A lot of bloggers blogging about blogging will tell you to start a blog. Ya right, I work harder on this site than I have at some jobs, and if we’re being candid, the pay here sucks.

What’s that leave us?

Dividends… bonds… that’s about it. And with today’s yields, you’re looking at a years and years of savings to get any meaningful passive income out of those. As much as I talk about my own Vanguard fund, 10 years of saving later and it’s only spitting off a little over $1,000 of true passive income per year.

C’mon, this title said EASY passive income!

The Tale of Two Wizards

Let’s consider the tale of two money wizards. We’ll call the first one Money Wizard 2016. This guy ate out like a clueless millennial. Not really for any special occasion, but just because he was too lazy to wake up an extra 10 minutes early and slap together a lunch.

Then there’s Money Wizard 2017, or Money Wizard 2.0, as I like to call him. Money Wizard 2.0 has risen at 6:00 AM sharp for the past three months, diligently slapping together PBJs with the ferocity of an iron chef.

These efforts have saved him about $8 a day on lunch, or $40 a week. If Money Wizard 2.0 keeps it up, he’ll clock in over $2,080 in savings over 2017.

I can’t think of a faster way to give yourself a raise than spending less money. In my real career, I worked my ass off for a year straight and was rewarded with a $1,680 raise… I’d have been better off making sandwiches!

Just how much is $2,080 in annual income worth? With today’s risk free bond market rate of 2%, $2,080 per year is equivalent to, wait for it… living off a $104,000 bond portfolio.

Spending Less – The Ultimate Source of Passive Income

Now we’re to the real meat and potatoes here, or should we say peanut butter and jelly?

At a basic level, spending less acts as the truest source of passive income.

In fact, I’d go so far as to say spending less is the easiest passive income source in the entire world. It’s probably the only way to do absolutely nothing and put more money in your pocket.

Want to save money on clothes? Maybe you have plenty of last season’s styles which look good and fit great. Maybe you don’t need to go to the store. Bam – saved time AND money.

Want to save money on groceries? Most of the store brand food tastes as good as the name brands… and I even heard a rumor the same manufacturers sometimes make both. Another (possibly less fun) plan: try eating a little less and jumpstart the diet that’s been on your to do list since New Years 2014. Bam – saved money AND don’t have to cook as much food.

Want to save money on travel? Consider a relaxing weekend at home or a staycation. Less trip planning AND saved money.

How to spend $2,000 shopping:

passive income shopping

How to save $2,000:

easiest passive income source

With this mindset, the opportunity for passive income is everywhere!

  • Signing up for Netflix instead of DirecTV? Congrats on yearly savings of $1,000, which is equal to holding $25,000 in dividend paying stocks.
  • Choosing a high mpg car over a gas guzzling dinosaur burner? Enjoy gas savings of $1,600 every year, the equivalent of annual payments from $80,000 in bonds.
  • Better yet, keeping your old beater instead of going to the dealership and picking out a $300 a month car payment? Enjoy the equivalent of $180,000 in bonds!

At most, these decisions require substituting one choice for another. Many require even less, such as choosing to spend your Saturday relaxing, rather than driving all over, negotiating with salespeople, and buying things.

The Quadruple Whammy of Spending Less

Despite what the brainwashed masses will have you believe, spending less is the sort of thing which quickly becomes a habit.

Once you get into the routine of spending less, you’re likely to find yourself on auto-pilot, cruising through life wondering where all your extra money is coming from.

The effect is profound. Spending less doesn’t just earn yourself a passive income source, but once those changes accidentally become permanent, it also reduces your expenses, forever.

What’s this mean?

Reducing your spending is actually more powerful than increasing your income.

Why? Each dollar you save pulls a quadruple whammy of awesome. By spending less:

  1. You’re instantly putting more money in your pocket, which by itself acts as a passive income source.
  2. You’re increasing how quickly you can save towards traditional investments.
  3. AND you’re creating the habit of spending less.
  4. AND you’re permanently reducing the amount of income you need for the rest of your life.

This is like compound interest, on top of your investment’s compound interest. While your money is exponentially growing away, spending less is also rapidly increasing your savings and decreasing how much you’ll need. You’re widening the gap on both sides.

If you’re aiming for freedom, there’s no faster way to get there, regardless of your situation.

Oh, and if you’re serious about tracking your spending, I highly recommend you open a free Personal Capital account. You’ll get access to high tech money management software, including up detailed breakdowns of all your expenses. For my money, it’s the easiest way to start building that ultimate passive income stream.


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Filed Under: Early Retirement, Investing, Saving Money

Reader Interactions

Comments

  1. JulianT says

    June 26, 2017 at 9:59 am

    Great article….not enough people really understand the opportunity cost of spending more, especially when it involves debt. The difference in future financial wealth between paying interest on a depreciating asset like a car or worse a consumable good, vs investing that money into mutual funds is profound. There’s the interest paid on the car, the depreciation of the car the longer you own it, then there’s the missed interest had the money been invested, there’s the opportunity cost of your freedom by being tied down to a loan, and then there’s the lowering of your savings rate which prolongs retirement and theoretically increases your spending needs if you keep up the bad spending habits. Financed a new car? I hope you love your job and it’s recession proof because now you’ve sold away your future cash flow to impress someone at a stop light that you don’t know, and you can’t leave your job because of it.

    Reply
    • The Money Wizard says

      June 26, 2017 at 10:49 am

      If I’m counting right, that’s a quintuple whammy?? Great comment as usual Julian.

      Reply
      • Madhusudan Rao says

        July 6, 2017 at 1:38 pm

        Hey,

        Great article. I think you might also need to take into account the tax you pay on the bond yields at the marginal tax rate, unless your investment is from a tax free account. So a 2% (annual) yield translates to 1.4% yield after taxes. So, you need about $150 k in bonds, not $104 k and so on..

        Cheeers,

        Reply
  2. The Savvy Couple says

    June 26, 2017 at 10:30 am

    Omg we love this! Super $avvy!

    Just like loosing weight it’s so much easier to gain weight then loose it.

    Spending less and living a frugal life is an amazing option as a passive income.

    Reply
    • The Money Wizard says

      June 26, 2017 at 10:50 am

      The similarities between money and staying in shape are astounding.

      Glad you liked the post!

      Reply
  3. Lance @ My Strategic Dollar says

    June 26, 2017 at 10:41 am

    Wow! Thanks for sharing! Generating passive income streams is a long-term project but once it’s created, it’s amazing! I absolutely love having a frugal life and less to worry about and in less expenses to cover in the future.

    Reply
    • The Money Wizard says

      June 26, 2017 at 10:51 am

      Couldn’t agree more, Lance.

      Reply
  4. The Financially Savvy says

    June 26, 2017 at 11:42 am

    There is nothing like reviewing your budget at the end of a month and noticing you spent less than expected… then sending that money straight into the investment account of choice. Favorite part of the quadruple whammy!

    Reply
    • The Money Wizard says

      June 26, 2017 at 3:24 pm

      Yes! Love that part.

      Reply
  5. Laura says

    June 26, 2017 at 1:44 pm

    The clickbait was hilarious – and so true! The key to saving more is spending less – sounds easy but it takes a lot of hard work, prioritization, and self control. I feel like a lot of the “passive” income, to your point, isn’t as impactful as people might think and the time vs. money equation doesn’t always pay out.

    Reply
    • The Money Wizard says

      June 26, 2017 at 3:24 pm

      So true. And from the active income side, there’s a great irony in say, filling out hours upon hours of surveys to make a couple bucks, then immediately buying a $25 dinner to wipe it all away and then some.

      Reply
  6. Solitary Diner says

    June 27, 2017 at 10:02 pm

    I really wish someone had taught me this when I was 18! Better that I learned it at 37 (when I started reading FIRE blogs), but an extra 19 years of living this way would’ve been helpful.

    Reply
    • The Money Wizard says

      June 28, 2017 at 7:36 am

      Better late than never! Somewhere, there’s an 80 year old wishing they learned it at 37.

      Reply
  7. Louellen says

    June 28, 2017 at 10:29 am

    A quintuple whammy? How about mentioning the tax advantage too!

    Reply
    • The Money Wizard says

      June 28, 2017 at 10:43 am

      Love it!

      Reply
  8. Elena says

    June 28, 2017 at 6:32 pm

    Great article as usual! I wish my son was thinking the same way! Most of young people want everything right now without thinking about the future too much. They feel like they will be young forever to catch up in finances.
    The sooner you adopt this frugal mentality the sooner FI will knock on your door.
    Thank you much!

    Reply
  9. William says

    July 7, 2017 at 5:37 pm

    Great article, I’m always advocating the benefits of spending less. You can throw one more out there as well; spending less allows you to earn less, which in turn reduces your taxable income. I’ll give my example: I have a substantial household income, approximately $235k per year. I also have the opportunity to work overtime… But when I start working my overtime, I pay more in taxes as my annual income increases. I figured it would be smarter to aggressively pay down my mortgage, so that I could increase my cashflow while living on less, which would in turn allow me to work LESS overtime, and thus pay LESS in taxes(…and be home more!). It’s amazing what living a frugal lifestyle can do for you.

    Reply
  10. Terry Pratt says

    July 14, 2017 at 7:20 am

    “…regardless of your situation” is just nonsense. If you’re living on say $12K a year and you’re paying market rent in an expensive city, forget about passive income. The only one getting passive income in your world is going to be your landlord.

    Reply
    • The Money Wizard says

      July 14, 2017 at 7:48 am

      Jacob from Early Retirement Extreme lives off $7,000 a year in San Francisco. Nothing is impossible.

      Reply
  11. Courtney says

    August 10, 2017 at 2:23 pm

    Great article! Spending less is never a bad idea. I can’t say that I have seen anyone else compare spending less to passive income, but it makes sense. Thanks for sharing.

    Reply
    • The Money Wizard says

      August 10, 2017 at 3:06 pm

      Thanks! Can’t say I have either… but it’s one of those weird mental exercises I find myself doing all the time for fun. (I know… I know… I can hear the chants of “neeeeerd!” from here.)

      Reply

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