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Tuesday, February 6, 2007

Passive Income

I want you to take a step back and just think about this question; Why do you invest for retirement?

The answer that you have been bombarded with is something like this;
One must invest and have there money grow so that once they retire they can live off the income from no risk interest paying investments. Your planner probably came up with a fancy work sheet and questionnaire and at the end they tell you based on X% interest you will need $Y when you retire so that you can have an income of $Z per month when you retire. This income is called passive income. If you think about it, that is what we are all in the end trying to achieve.

Passive income is when you work once but continue to get paid over and over again from work you're no longer doing. Passive income, in most cases is income earned from real estate investments or true businesses owned and operated independent of your personal involvement. Investing in or creating true assets that provide passive income for you is your ticket to wealth. To gain financial freedom you need this cash flow from Passive Income. So far so good.

This is the thought pattern I went through back in early 2001. However, this seemed impossible. The market had crashed. I had no Idea how I could save enough from my earned income to eventually build up a nest egg. So, like everyone else we keep chasing the big score on a real estate deals, stock market or even a lottery.

There is no such thing as something for nothing. That is why most of will fail at achieving the big score.

The problem is that Wall Street has it backwards. Instead of focusing on investing for capital gains, you should focus on income invest immediately. That's right forget about capital gains-no matter how old you are. I decided that when I retire I need so much a month to live on. So at 45 years old I sold all my stocks and mutual funds in my RRSP (IRA) and focused on income producing securities. This is when I discovered Canadian Income Trusts. I had less than $70,000 in the RRSP at the time and today that account alone is producing over $1,000 per month income. Because of compounding this account will probably be producing about $14,000 per month income when I turn 65 years old. Now that's passive income! This does not include my other portfolios.

To put it simply, passive income is income that continues to generate money for you even when you have stopped working. Passive Income is financial freedom with real financial security.

For example, your rental income is a good source of passive income. Rental income includes payments made by an occupant for the use of property, payments to cancel a lease, advance rent, and any security deposit used as a final payment of rent. If you own a house and you rent it out, you will continue to receive your rental income for as long as you have a tenant, regardless of whether you work or not. Similarly, if you invest in unit trusts and it generates dividends for you, the dividends are your passive income. There are many ways to create passive income.

Financial freedom is not having to rely on a paycheck for your standard of living. If you are sick, or want to take a vacation, you will still have money coming to you from your investments. This is Passive Income. Passive Income is Freedom. Passive Income is Security.

The earlier you start planning and building your passive income, the earlier you can achieve being financially free. It takes time and effort, especially in the beginning, just like building anything worthwhile does. You build a foundation and gradually build up your passive income from there.

There are many types of passive income such as
· Private business income
· Real estate income
· Residuals on mutual fund sales (This is what financial planners, brokers and the entire financial industry runs on)
· Welfare Income
· Unemployment Insurance Income
· Workers Compensation Income
· Disability Income
· Government Pension Income
· Employer Pension Income
· Registered retirement plan income
· Interest Income
· Royalty Income
· Dividend Income
· Income Trust Income (Our favorite)

When you look at the list above you can see why government social programs are so popular. By the way if you plan your future around passive income from Government you will become bitter and disappointed. By the time you figured out that you have been fleeced it will be too late. Why? Because the passive income they give you will be less in real purchasing power than you think. The problem is that it is so gradual that the unsuspecting public does not see it happen.
As a matter of fact the real reason Mutual Funds are so popular is because they generate billions of dollars of passive income for the financial industry. Not for investors (suckers?) like you. This is why they advertise so much. This is why they tell you to buy and hold. Do not fall for the line that your planner gives you that he invests in the same thing because he is not relying on his investments for his passive income. He is relying on yours.

How can you build your Passive Income?

The cornerstone of all wealth is understanding the difference between assets and liabilities. The difference is this: Assets put money IN your pocket. Liabilities take money OUT of your pocket.

A liability is something that takes money out of your pocket." (Monthly and continuously) Most people think their home, car, and other possessions are assets. But, the truth is that in most cases those things take money out of your pocket. They cost you money. They don't make you money. Those things are liabilities. They take money OUT of your pocket each month.

Here comes a shocker----Equity in your home is dead capital. You must convert that equity into passive income.

An asset is something that puts money in your pocket monthly and continuously. When you have more money coming IN from real assets than you have going OUT to pay for liabilities, you will be financially free. This is really all you need to know. If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities. It's not knowing the difference that causes most of the financial struggle in the real world.

Our liabilities are someone else's (usually the bank's) assets. Most people mistakenly think of their home as their biggest asset. It is an asset - the bank's asset. Our home is usually our biggest liability in that it takes money out of our pocket month after month.

The rich buy assets. The poor only have expenses. The middle class buy liabilities they think are assets.

Real assets fall into several different categories:

1) Businesses that do not require your presence;
2) Dividend paying stocks;
3) Bonds;
4) Income Trusts;
5) Income-generating real estate; 6) Notes (IOUs); and 7) Royalties from intellectual property (books, music, patents?).

Most people use their money to buy liabilities whereas the rich use their money to buy assets that pay for their liabilities.

Start to plant seeds inside your asset column. Start small and plant seeds. Some grow; some don't.

There are three different types of income: Earned Income; Passive Income; and Portfolio Income. You must know what kind of income to work hard for, how to keep it and how to protect it from loss. This is the key to great wealth.

Earned income is income derived from your job. It is linear in nature. You work for an hour and get paid only one time for that one-hour's work, and that's it. Your income stops when you stop working.

The rich don't work for money; they have their money work for them. This is achieved through portfolio income and passive income.

Portfolio income is the income you receive from interest, dividends, royalties and gains you get from investments in paper assets.

Passive income is when you work once but continue to get paid over and over again from work you're no longer doing. Passive income, in most cases is income earned from real estate investments or true businesses owned and operated independent of your personal involvement. Investing in or creating true assets that provide passive income for you is your ticket to wealth. To gain financial freedom you need this cash flow from Passive Income.
But note the definition of a business!

Owning a business that provides passive income means the business works without you having to be there. You have a business if you can leave it for a year or more and then return to find it more profitable and running better than when you left. But if your business would falter without you then it's more like a 'job' than a business.

So you can think of earned income as coming from something you do. Passive income comes from businesses or real estate that work for you. And portfolio income comes from paper assets that work for you.

Everyone has income, but not everyone maximizes the use of that income. Of the four income patterns, the one to shoot for is that of the rich. And one myth you can dispose of is "It takes money to make money." Regardless of your income you can begin to acquire assets that return an income every year -- passive income that comes in, rain or shine, whether you work or not. This is money working for you, not you working for money.

Unlike passive income, earned income or linear income requires that you work for your money. You are basically exchanging your time and effort for money. You get paid when you work. The moment you stop working, you don't get paid.

The key to becoming wealthy is the ability to convert earned income into passive income and/or portfolio income as quickly as possible. The taxes are highest on earned income. The least taxed income is passive income. That is another reason why you want your money working hard for you. The government taxes the income you work hard for more than the income your money works hard for.

The rich incorporate their assets and are able to: Earn, Spend and Pay Taxes on what is left.

The poor and middle class work at a job and must: Earn, Pay Taxes and then Spend what is left.

This is so powerful that we predict that if our governments do not make some attempt to reduce corporate taxes and prevent the double taxation of dividends; that the market capitalization of income trusts in Canada will exceed the market capitalization of the TSX/S&P 300 index.

Wealth and freedom can, and should, be yours. You have the right to acquire it. The family that is jet setting around the world, teaching their children about art in Paris and about science on the Amazon, eating out whenever they want to, cruising on yachts, hot-air ballooning over wine country, relaxing on tropical beaches, has no more right to all of that than you. We believe you can have, should have, and will have all your dreams. All of them.

Only 4% will actually achieve freedom of choice or financial freedom, and a mere one per cent actually achieve his dream for true wealth. This means that only 5% of people are able to provide for themselves when they retire. Are you currently positioned to become one of the 5%?

Statistic further shows that of this one per cent, 74% made their money from running their own business, 10% are professionals, 10% are CEOs of large companies, and the rest achieve wealth from other sources.

The main reason people struggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money but never learn to have money work for them. The rich don't work for money; they have their money work for them.

This can be achieved through passive income.

We at are focusing on passive income using Canadian Income Trusts. We think it's the easiest way to achieve passive income. One can start with as little as $1,000. We can all be little Warren Buffets.

You see before World War II investors invested in stocks for income. But after the war this started to change slowly. By the end of the millennium the stock market became a huge capital gains generating machine with little or no income.

We speculate that the trend to capital gains was due to favorable taxation of capital gains over dividends. However, we believe we are on a long term secular trend where we will see the stock market convert from a capital gains machine to an income generating machine. This has all ready started with the BUSH tax plan that tried to make dividends tax-free. This is only the beginning. The USA will lead the way for all nations. I bet you that in 20 years from now most stock market returns will be from dividends/income and not capital gains. Buy the time the experts figure this out and tell you they will have deprived you of billions of dollars of income.

We strongly recommend that on a long-term perspective you get out of stocks and mutual funds that do not pay income.

We have given you a lot to think about. Remember, we have nothing to sell you here. Instead of listening to the media and all the experts just think about this on your own. Your gut will tell you that we are right.

Remember, as Warren Buffet said if you are a poker game and you cannot figure out who is the patsy then guess what...your the patsy.

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