The Key to Wealth – Making Your Money Work for You

People often talk about and dream about getting rich. Unfortunately, for many that is more of a hope and a wish than anything else. Even the way the idea is worded points to luck more than a strategy. A more systematic and sustainable goal is that of building wealth. You get something that is given to you either intentionally or not, whereas, when building something, you tend to be more intentional and involved in creating the outcome. Another common misconception is that being in a good place financially is based on the income you make. While earning an income is critically important in being able to build wealth, how much income you earn is not necessarily the most important thing. Whether you’ve seen it in your own life or someone else’s, it is clear that earning a large paycheck doesn’t always translate to a financially healthy life. If you spend everything that you earn, you will have to keep earning forever to maintain your lifestyle. Most people don’t want to have to work to earn a living forever, and whether because of age or health, most people will not be able to work to earn a living forever. With that in mind, let’s look at what does make for a financially healthy lifestyle or you might even say financial independence. If you have to give your time and effort to support your lifestyle financially, there is at least some level of dependence in place. True wealth is when you don’t have to put in your own work to make a living, or stated another way when you can make money while you sleep. That happens when your money is working for you. This will be the focus of the Financial Empowerment Conference hosted by Turner Chapel AME Church, of which I am a part of the planning team, “Making Money While You Sleep”, which is another way of discussing how you can create sources of passive income. The conference will be held on February 28-March 1, 2025 at the church, and anyone interested is invited to attend either in-person or virtually by registering at this link. During the conference, we will have a panel discussion with professional experts in business, tax, and real estate to discuss strategies for generating passive income. In this issue of the newsletter, we broaden out to discuss multiple ways of creating income that you don’t have to get up and go to work to earn on a daily basis.

Getting Ready to Create Passive Income
The term passive income can send a message that no work is involved when that is not actually the case. Like so many other things, there is no “silver bullet” to creating passive income just like there is no “silver bullet” to building wealth. Unless you are fortunate enough to inherit a fortune or get lucky and win the lottery, you very likely will need to work your way over time to a place where passive income is something you can benefit from. I heard a question asked at a forum where someone wanted to know how they could quit their job and have the ability to just sit on their couch but still be able to maintain their lifestyle. If that is how you view creating passive income, you may be disappointed in what is required. If you want to create the kind of passive income that will enable you not to have to work to earn a living, you will most likely have to put in a significant amount of effort up front to get into that position. Why? In most cases, it takes money to make money. If you want to have the money/capital that will allow you to engage in the kind of activities that will generate passive income, you will have to not only earn money but save an invest in such that it builds a pool of assets for you that can be used to fund your passive income venture. So, in addition to earning money, you also will need to make good decisions on how you use what you’ve earned to establish the building blocks that can allow you to have the choice whether or not to work in the future.

Passive Income that You Are Actively Involved In
If you’ve done the up-front work to build your base of capital to create passive income opportunities, there are many places you can deploy that capital to make it work for you. As noted earlier, we will discuss some of those strategies during the Financial Empowerment Conference, but for the sake of time, we will take one of those strategies as an example of how you can make your money work for you - in real estate. Real estate is one of the most impactful wealth building tools we’ve ever seen, in part because as the saying goes, “they aren’t making any more land”. When you have a scarce resource like land, if you own some of that scarce resource, you are in a position to have that resource make money for you. Many who use real estate as a tool for passive income serve as landlords for residential buildings, in part because the cost entry point is something that they feel is more manageable. That approach of renting out real estate, an income strategy, allows you to receive income from a renter and have a profit if the rent is higher than the ongoing expenses paid, like mortgage, maintenance, and repairs. In the early stages of such a venture, the profits will likely be very slim unless a significant down payment is made on the property purchase; however, once the mortgage is paid off, the margins can increase substantially. In that sector, you can also be involved in buying and selling real estate to turn a profit, usually through buying and rehabilitating property at cost then selling it at a higher price. That approach may not take as long to be profitable, but due to the costs involved in acquisition and disposition of the property, not to mention the rehabilitation phase, it is important to be financially solvent and have skill at your disposal in terms of executing the strategy. In both approaches, while income is generated that you may not be directly working to earn, you will typically need to be actively involved in executing the strategy, at least early on. If you want to get to a place where you aren’t as actively involved, you may need to build a more significant business such that you can afford to pay others to manage the strategy while you collect the money. Working in the commercial real estate space can enable you to generate more significant margins and have more skilled people working on your behalf, and one of our conference panelists will be speaking on that topic.

Passive Income Where You Can be Hands Off
Generating passive income that you don’t need to have much involvement in is the ultimate Making Money While You Sleep approach. As noted earlier, getting to that place, you may need to take some smaller steps to make that possible. This kind of passive income typically comes from financial investment in something, whether a business or a financial instrument, where you are simply the means of funding to allow some other entity to perform its work. It’s akin to being a silent partner. However, if your participation is only as a money source, and you are not actively involved in doing the work, chances are your cut of the profit is going to be less than those who are actively doing the work. Therefore, to generate enough of this type of income to enable you to support your lifestyle and not have to work means that you are likely to need a much larger asset pool that can be used to fund these types of activities. For another example, we can point to making money from dividend paying investments (e.g. stocks, bonds, etc.). Let’s say you are investing in dividend paying stocks that distribute at a rate of 3% annually. If you want to live off the income those dividends pay and you need $75,000 of spendable income to live on, to generate that much in annual dividends, you would need to have $2.5 Million invested in those dividend paying stocks. Is that achievable? Certainly! Is it easy to get there? No. If your goal is to build wealth and have true financial freedom, at whatever level is required for you, real passive income is a valuable tool to make that happen.

Sure, it is possible that you get lucky and do very little work of your own to have the kind of passive income that will support your lifestyle, but it is more likely that getting to that place will be a process. You may have to work, maybe harder than you want doing something you aren’t as excited about for a period of time, before you get to a place where you have the kind of capital to be able to live off purely passive income. It doesn’t sound easy because it’s not, but it is well worth it.

Stewardship Emphasis
“You make money during the day, but you build wealth in your sleep.” – John Hope Bryant

The Empowerment Channel    |   Volume CCXXXIV   |    Dedicated to Promoting Financial Education through Stewardship