Passive Income Is As Good As Retirement
There are three forms of wealth building, also known as income categories:
1.) Passive - Passive income can be defined as any source of money that finds its way to you without active management on your part. Examples would include rental property income, stock dividends, and certificate of deposit yields (CDs).
2.) Autonomous - This I've defined as something that isn't strictly active or aggressive pursuit of income, but rather something that requires a little bit of attention to keep cash flowing. This could be flipping cars as a hobby; one could spend a few hours here and there, eventually you sell and see a return. It doesn't actively require you to participate at all times, but you can earn money from the participation. You also are not harmed by not working on it. Another example of autonomous income would be running a website. There are elements of passive income that come into play if you have a good reputation, regular traffic, and corporate sponsors for specific advertisements on your website. I put it in the autonomous bucket because it would require you to at least make a little effort from time to time - writing new articles on a blog, or updating your store to include newest designs, technologies, trends. That sort of thing.
3.) Aggressive - This a day job or whatever you spend your 40+ hours a week doing to support yourself. I call it aggressive because it requires constant participation to yield a return. The benefit, of course, is that you can count on the income and the only person to blame for it not rolling in week after week is yourself.
I'm going to focus on passive income, and how it blurs the line between working life and retired life. Consider the notion that aggressive income is the enemy. It is a means to an end, and that end is 100% passive income. It will take years of diligence and work in order to arrive at the other end of the spectrum. Social security, taking chunks out of a 401k, or a pension plan paying out are all forms of passive income in retirement. That's all well and good, but if you can find other sources of passive income that feed you month after month, it's as good as retirement. The goal is to establish these passive incomes while you are young, and manage them throughout your life.
You should have an income portfolio, just like you would an investment portfolio. More importantly, you should have a plan to diversify that portfolio and begin leading yourself away from aggressive sources of income. When we enter the workforce, that income portfolio is likely 100% aggressively sourced. Every penny of your money is sourced from Time for Money exchange: TfM. Don't get caught up thinking that TfM is the ultimate way of life until retirement - it is simply one path that happens to be the most frequently followed. People follow it because for the most part, it works. Stay neutral or conservative with your investment strategy, work your whole life, be frugal, and the system churns out your retirement savings without a hitch. But why wait for retirement age to retire? If you can build passive income progressively throughout your life, traditional sources might not even be necessary to stop working (such as 401k, pension, social security, etc).
The concept of building passive income while you are aggressively working towards it is inherently counter intuitive. Isn't the whole idea that you're passive, as in you don't have to worry about doing anything? The answer is "kinda". You have to actively pursue passive income in the beginning, and it only truly becomes passive in the literal sense of the word when you've labored through years of hurt to get it to that point. You've got to put the work in up front in order to see the benefit later. A rental property is a great example. You put in the down payment now, pay extra on the term, and you might be collecting the entire rent 10 or 15 years down the line. Get two or three of those properties, and there's a fair chance that you'll have enough coming in to stop working. Of course, then you have to worry about managing the properties, but that's beside the point. Having a pile of investment properties and rentals alone isn't diverse, and any investment that isn't diverse has a higher risk of failure than a diversified portfolio. If the housing market crashes and you can't find renters, you're stuck paying 4 mortgages. Not ideal.
There aren't a lot of options as far as passive income generation goes, but if you focus in on a specific one, such as entrepreneurship, even the sky isn't a limit. Rental properties, stocks, bonds, CDs are all pretty straightforward, cut and dry type ideas. You can learn about them, understand them, do your homework, put in some work and some dollars, and come out ahead in the long run. But both the challenge and potential for high returns is in the starting of a business (or investing in an existing one), or the launching of an idea. Always consider that you should be able to monetize at some point down the road. If you can build 20 dollars per month of passive income every month, in 10 years you'll be making 2400 dollars a month. After taxes, that's not an unreasonable amount to live on (or quit your job and start your own business). That's the power of progressive passive wealth generation.