Have you ever pondered what it takes to create wealth? In order to get on your path to financial freedom, you need to understand what it takes to get there. In any real estate or business venture or even in our personal lives, there are three things that need to occur simultaneously to create wealth for us. Those three things are Active Income, Passive Income and Enhancing our net worth and increasing our asset base.
Active income is where you exchange your time and energy for income. You are active and working at it. If you do not work at it, you do not get paid. Another term for this would be working income. Your current job would be considered active income.
Your active income will not make you rich unless you are building something that will generate passive income. It does not matter if it is a high paying active income job; the bottom line is if you do not show up and do the job, you will not get paid. Some examples of active income in real estate are property managers, home appraisers, real estate agents and contractors.
Passive income is income that is generated by assets or other people where you are not actively participating. Apartments are a good example of passive income. You either invest your money into it and make it a passive vehicle for you or you invest your time and energy one time to create it and the asset pays you forever. Passive income examples for real estate are rental properties, equity participation and private money lending.
Passive income is really the path to financial freedom. The basic definition of financial freedom is when your passive income is more than adequate to pay for your desired lifestyle. To create your financial freedom plan, you must figure out how much you require per month to pay for your desired lifestyle and what investment vehicles you are going to use to get there.
Enhancing our net worth and increasing our asset base is the third step in creating wealth. First, we need to define net worth and asset. Net worth is simply the difference between your assets and your liabilities. Assets are anything that delivers monthly income. They are yet another means of producing passive income. Everything comes back to passive income when it comes to securing your financial freedom.
Once you come to the realization that passive, not active, income is the key to your financial freedom, then you have taken the very first step toward creating wealth for yourself.