Sunday, August 21, 2016

How The Passive Incomes of The Financially Free and The Rich Compare?

How The Passive Incomes of The Financially Free and The Richest Compare? Rich and financially free enjoy high passive income streams.
The Passive Incomes of The Rich Are Many Times Their Lifestyle Costs


Based on financial means and status, people can be classified into active income dependent, those who have earned financial freedom and the rich. If we observe carefully we can discern that the passive income streams of these three categories vastly differ. This short post, a slide literally, examines how the residual incomes of the three compare and provides insights and links to profound concepts like what is passive income, what is financial freedom and how to become rich. You will find tight correlation between ideas discussed here and those found in Robert Kiyosaki’s most popular and classic work, “Rich Dad Poor Dad”.

How the Incomes Compare



How the Annual Incomes of the Three Categories of Citizens Compare
Passive Incomes
 Active Income Dependent ($)
Financially Free          ($)
 The Rich          ($)
Interest
 100
 24,000
 4,000
Dividends
 -  
 58,000
 10,00,000
Royalty
 -  
 3,500
 -  
Rent
 6,600
 -  
 2,00,000
Sum of streams of passive income
 6,700
 85,500
 12,04,000




Active, Occupational Income
 48,000
 18,000
 6,00,000




Total Income
 54,700
 1,03,500
 18,04,000




Present Lifestyle Expenses
 54,000
 78,000
 3,00,000




Surplus
 700
 25,500
 15,04,000




Investment for generation of passive incomes in future
 -  
 23,000
 14,00,000




Surplus Income lying in savings account in bank yielding low interest
 700
 2,500
 1,04,000



Following conclusions can be drawn from a study of the above table:

  1. Active, Occupational Income: The active income of the  wage earners (not financially free yet) is almost the main and only source of income. For the financially free individuals the active income constitutes a small portion of the total income. The richest individuals inspite of their riches often have large active incomes; they are not lazy.
  2. Passive Income: Passive Income of the regular wage earner is miniscule. The financially free enjoy significant passive income, that slightly exceeds their present lifestyle expenses. The rich have huge passive income streams that far exceed their lifestyle expenses.
  3. Surplus and Investment of Surplus: Common folks have small and insignificant surpluses that can be invested. The financially free fave modest investible surplus for generation of future passive incomes. The rich have and invest significant sums every year to further augment already existing high levels of residual incomes.

How to Become Rich


Becoming rich is a process involving various steps.


It is advantageous to start early. When young and strong it is better to work hard as well as smart and earn copious sums of active income, keep lifestyle costs low, avoid splurging, save and make prudent investments. These investments generate passive incomes. Once the passive incomes exceed lifestyle costs, it means one has attained financial freedom. Financial freedom is the first and major steppingstone on the path to real wealth and riches.

Suggested Further Reading:






Conclusion



There are three classes of public, namely the wage earner, the ones who have attained financial freedom and the rich showing vast differences in their passive income streams and investible surpluses. Keeping lifestyle costs low, investing to generate residual incomes leads to financial freedom and eventually to significant riches.





What will give me more profit after 5years? Investment in properties or in stock market or in mutual funds?



Your question has two major elements and the second major element another three sub options, as follows:

  1. Investment Timeframe - Five years
  2. Investment Options:
    • Property
    • Stock Market
    • Mutual Funds
All value investors, including myself, do not consider property as an sensible investment option for the simple reasons, it is:
  • Illiquid
  • Return on investment by way of rent is unjustifiably low
  • Capital Appreciation benefit is available as in shares and mutual funds but the quantum is more dependent on luck.
The investment options left are only stock markets and mutual funds, but before I address them let me take-up the investment period element.
An investment horizon of five years is very short. twenty years is minimum and about fifty years is ideal. Only when you invest for such long time, the law of ‘Miracle of Compounding’ will have the opportunity to work for you and make you really rich and wealthy.
Coming back to investment options of stock markets and mutual funds, both are good. Direct stock market investing requires special knowledge which you can acquire from the book, Intelligent Investor - The Investors' Bible and you may also kindly visit my blog,Value Investing.
As far as mutual funds are concerned, they are the best choice for those who do not wish to or do not have the time required to study stock market investment. One of the problems with mutual funds is that they charge a heavy fund management fee. There is yet another version of the mutual fund called an ‘index fund’ or ‘exchange traded fund’ which mirror popular stock market indices like the S&P BSE Sensex or NIFTY 50, where the charges are low and very reasonable.