Years ago, when I was nearing my breaking point with jumping from job to job and was ready to throw in the towel on the whole working thing, I had a sudden aha moment which changed my entire career trajectory.
It was just a tiny shift in perception, but it led to a massive shift in how I approached my career path and job hopping.
After going through nine jobs in ten years and on the brink of going on to my tenth job, I suddenly realized that there was a way out, a way I hadn’t thought of before. By thinking outside the box, I could finally get off the W-2 hamster wheel and have the freedom to do what I want, all while continuing to make money (and even more money than I was making at my job!).
How is it possible, you ask? That’s exactly what we’ll talk about here. So, if you’re at your breaking point and want to discover the way out, keep reading, as this tiny shift in perception could make massive waves in your life too.
The Aha Moment
During the year that I was working my ninth job in ten years, my husband was in the third year of his real estate business, and it was really taking off. As such, he asked me if I would be interested in helping with his business.
To which I said, “Heck no! I’m busy with my own career over here, thank you very much.” 😂
But after some consideration, I conceded and set out to see what I might be able to do to help his business. Once I took a look at his website, I knew. This would be my project.
His website at the time was just a single page, with a dark background, a blurb of white text on one side, and his photo on the other. I was beyond shocked that he was doing business with this meager web presence, but hey, the bar was low, which meant that there was nowhere to go but up.
That summer, in between going to meetings and completing work for my 9-to-5 job, I drove all around the San Francisco Bay Area, taking photos and videos for his new website.
At the end of the summer, we launched his brand new website, which couldn’t be more different than his old one. In the process, he mentioned that he hoped to help people just like us, who were getting started with real estate investing.
I had very little marketing experience at the time, but I said, “I think there’s this thing called content marketing? And I think if you want to help people get started in real estate investing, we need to write some articles about how to do that.”
Discovering The Power Of Passive Income
That’s when I fell into the real estate investing rabbit hole. It was a fast and furious love affair that completely took me by surprise.
Whereas my husband and I had been house hacking for several years at that point (i.e., buying a duplex, living in one unit, and renting out the other), I soon discovered that there were a LOT of different ways to invest in real estate – out-of-state investing, short-term rentals, fix-and-flips, and even something called the BRRRR method (buy, rehab, rent out, refinance, and repeat).
It was this last strategy – the BRRRR method – that suddenly gave me the aha moment I didn’t even know I was looking for.
You see, through the BRRRR method, the idea is that you make an initial investment in a rental property. Then, you do some work to improve the property and then rent it out.
Once you do that, you can then pursue a cash-out refinance to pull out your original investment amount, giving you the capital to rinse and repeat with a new property, all while having your tenant continue to cover the mortgage and expenses through rent payments.
Through acquiring a string of properties, you could start to create meaningful amounts of passive income every month, and that was the true aha.
I realized that, if I could just buy X number of properties and ensure that they produced X amount of cash flow every month, I could replace my salary and not ever have to work again.
Ding! Problem solved.
3 Types Of Income – Active, Passive, And Residual
Up until that point, I had never considered the idea of active vs. passive income. I thought that, if I wanted to make money to live, I had to work for it, which is why I tried so hard to find the “perfect” job.
Once I realized that there was another way to make money – a path that could get me out of the job hopping hamster wheel altogether – I realized that that could be my ticket out. After all, if I could continue to make money while sitting on the beach and doing nothing, that was truly the dream.
Just to make sure we’re all on the same page, let’s walk through the three most common types of income – active, passive, and residual income – so you can start to see how they might fit in with your overall goals.
Active Income
Active income is what most people think of when they think of making money. You actively do something (i.e., work a job), and in return for your time and effort, you get paid.
Active income is your salary or paycheck. If you do the work, you get paid. If you quit your job or get laid off, you no longer get paid.
Active income is how most people get started in life, whether it’s with your first job at McDonald’s, a paid internship, or the first job you get after college.
At that time in your life, you likely have little savings, so you need to trade what you do have – your time and skills – in exchange for money.
However, as you have probably seen with the mass layoffs during the COVID pandemic, as well as the shifts in the overall job market, the problem with active income is that it’s a never-ending treadmill.
If, for any reason, you are not able to work (whether due to your own choices or things outside of your control), you no longer have access to that stream of income.
This can put you in a very precarious situation, especially if you are depending on each paycheck to be able to pay your bills and cover your rent.
Plus, because you only have so many hours in the day that you can exchange for money, this puts a cap on your active income potential.
Passive Income
Passive income, on the other hand, is income that comes in, regardless of whether you work or not. Even if you sleep all day, spend a month on the beach, or travel the world, that passive income still continues to come in.
Most likely, you are already generating some amount of passive income, though it may be very little. For example, the interest payments on your bank account – that’s passive income. And if you invest in the stock market or real estate, the cash flow or dividends you receive are passive income too.
For most people, this passive income is an afterthought. It’s a nice-to-have, but not something you spend very much time thinking about, and probably not something you really count on for your day-to-day expenses.
However, if you were to intentionally build up your streams of passive income, you’d eventually reach a tipping point, where your passive income might start to equal or even surpass your active income.
At that point, you will have reached true financial freedom, and you could choose to quit your job and never have to work another day in your life.
Plus, because passive income is not dependent on your time or effort, you can create infinite streams of passive income, giving you the potential to exponentially increase your income without limit.
Residual Income
The third and final type of income we’ll talk about here is residual income. This is the type of income that comes via building or creating something that then continues to generate income even after your work is done.
If you were to write a book or create an online course, you would likely need to do a good amount of work to build and launch those products, but then once you get them out into the world, they may take on a life of their own and continue to generate income for you without you having to continue to write or build courses.
For example, let’s take the book, What To Expect When You’re Expecting – an evergreen book about pregnancy. When I was pregnant with my first child, I picked up that book as one of the first and main sources of info for the journey ahead.
It turns out that over 90% of pregnant women who read pregnancy books end up picking up that book, which has now sold tens of millions of copies and has been translated into over thirty languages.
What To Expect When You’re Expecting was originally written and published in 1984, but because it’s just as relevant today as it was then, people continue to buy it, which generates residual income for the original author.
The best part of residual income is that anyone can do it. You don’t need much seed money to get started, just a passion to teach or create something that others may need and thus pay you for.
The Path To Replacing Your Active Income So You No Longer Have To Work
Now that you know about the multiple types of income streams outside of the salary you receive from your day job, the real fun begins.
When active income is your only source of income, you are very limited in what you can do and the options available to you. Your choices are between working this job or that job, but regardless, working – and hence trading your time for money – is a critical piece of the puzzle.
However, once you realize that active income is only one source of income, you can start to think outside the box and make a strategic plan to replace your active income and thus achieve true freedom.
Step #1 – Determine Your Baseline Expenses
To start mapping out a strategy to replace your active income, the first step is to take a look at your current financial picture, and in particular, your ongoing expenses.
Take a look at your expenses over the last 6 months, including your credit card bills, rent or mortgage payments, utilities, etc. Then, average out your monthly expenses and add 10%. (The 10% gives you a little bit of a buffer for things like seasonal expenses and unexpected costs.)
This number is your Freedom Number. It’s the amount of income you need to replace via passive or residual income, in order to no longer have to work.
Step #2 – Create Your First Stream Of Passive / Residual Income
Once you determine your Freedom Number, it’s time to create your first stream of income outside of your day job. This will be your proof of concept, so you can see that this can actually work for you.
There are lots of ways to create additional streams of income, depending on the amount of money and time you have to invest into creating the stream of income.
Here are some ideas, to get you started:
- Invest in a cash-flowing rental property
- Do peer-to-peer lending
- Rent out part of your home (this could be a spare bedroom, garage, or even parking space!)
- Invest in the stock market or index funds
- Invest in a high-yield savings account
- Write a book
- Create an online course
- Launch a YouTube channel
- Create a blog
- Do affiliate marketing
- Sell your photographs or designs online
- Buy an existing business
Step #3 – Rinse And Repeat
It may take some work to get your first stream of passive or residual income off the ground. I remember when I first started, I launched an Etsy store to sell my designs and prints, and over the course of an entire year, I made less than $1,000, which wasn’t the most exciting thing, but it did show me that residual income was possible.
In addition to that Etsy store, I’ve also tried peer-to-peer lending, rental properties, index funds, blogging, YouTube, and more.
Just as you’ve explored different jobs as part of your career path, don’t give up if your first attempt at passive or residual income doesn’t take off. The important thing is to keep your end goal in mind – of replacing your active income – and to continue to chip away at it.
And, the other thing to keep in mind is that, more than likely, you’ll end up building multiple streams of small income, rather than one stream of massive income. You might have a rental property that generates $200 / month, an index fund that throws off $50 / month, and an online course that produces $500 every few months.
Each bit of passive or residual income counts! Every dollar you’re able to generate without having to actively work for it gets you one step closer to being able to replace your salary and no longer have to work. So, get out there and create some streams of income!
Final Thoughts – A Vision For Your Future
Right now, as you’re reading this, maybe you’re ready to be done with working a job. Maybe you’re burnt out and just want a break for a while, but you can’t just up and quit because you need your salary to live.
I get it, and I’ve been there too. The first step is to find a job that you’re good with. It doesn’t have to be your dream job, but it should be something that interests you and that generates enough income for your ongoing expenses.
Next, start to build up streams of income outside of your job. It may be difficult at first, but once you start to get the hang of it, the world is your oyster.
Soon enough, you’ll have multiple streams of income, and you’ll finally get to the point where you no longer need the income from your day job. At that point, you can either choose to continue working because you want to work, or you can quit your job and focus your attention elsewhere.
Through this journey, you will start to take the pressure off your day job and start to build reliable streams of income that will help to create true wealth and freedom in your life.
