Passive Income Goal: Near Miss and New Plans

Nearly a year ago I wrote about a goal to create passive income of $500/month. In that post I outlined 4 different things that would contribute to the goal. Over time those changed, but the result is that only one of them counts at this point. Our investment portfolio is, for the purposes of this goal, creating a passive income of $426/month. None of the other projects led to any income which means that I fell short of the goal. All of those projects eventually ran into obstacles that I didn’t feel were worth overcoming so they are currently on hold.

Good Leads On New Income Sources

As I mentioned before one of them did lead to another product that is more promising. My first attempt at selling it didn’t get me any results. Since then I have updated it to look a lot better and do a bit more and I expect the first sale this week from someone I have been talking to a bit. So far I have earned an hourly rate somewhere under $1 for this project based on the time put in but I am now working on promoting it to get more sales. If that generates even minimal results it should easily bring in at least $100/month soon, putting me past my original goal. Unfortunately that product is in an area where I don’t know enough to practice all the marketing techniques I have been learning about.

But the good news is that I have come up with another service where I can do most of those. Once again I saw a comment on a blog hinting at the need for it, and within a week I had created something for it and replied. In this case my strategy is to create a free version that does some basic tasks and then later sell additional services if there is enough interest. I have spent enough time researching the market that this service is for so I can do quite a bit of marketing. The fact that I’m giving something away for free makes it easier to get attention. And if that makes a good impression it will make it easier to sell something later.

Branching Out

I’ve also come up with some other ideas recently that I’m starting to test. Following my past experiences I am focusing on the first big step of getting potential customers on board before actually building the thing. I’ll spend a little money and time to try this but I’ll cut off the projects quickly if they are too hard to promote.

Two of these projects are e-commerce websites which are somewhat related. Usually when you hear about someone launching an e-commerce website to build passive income it tends to be pretty hokey. But these websites are based around things I would like to be able to buy more often, and I know what it takes to make them high-quality (if there is enough interest) and create lots of value in the market. To test these websites I am planning to set up very simple pages advertising 1-2 products and then try to get a few interested buyers. If that works I will build them up from there. Within hours of having the ideas I came up with some pretty extensive marketing plans that I can roll out in stages if things are going well.

Another project is a sort of affiliate site with a twist. It’s a comparison shopping site that’s focused on finding the exact product you want in a certain category. That part will probably have to be free but I could build some affiliate deals for the products it recommends. This site is also something I would personally want to use for purchases so I know how to make it better than anything currently available. To start with I will set up a website that shows the first search page and see if I can get people to try using that. If that works I will set it up to actually find the right products and then once that starts getting enough people using it I can work on affiliate deals.

Putting It All Together

If all of these projects work out it will give me experience with a variety of businesses. I would have one software product, one online service, two e-commerce websites, and one affiliate website. Setting up that range of businesses could take a lot of work up-front. Many people struggle to operate just one business. I think my past business experience, my constant study of other businesses successes, as well as my current energy and focus can take me further than the average person but it will still be challenging.

My strategy is to test the big obstacles early and kill off the projects that don’t overcome it. If they do work I want to quickly get them to a point where they can sustain a very minimal level of revenue without taking up much of my time. From there I can go around and focus on whatever looks like the biggest opportunity to build revenue. I will do everything myself at first but start outsourcing or hiring when it can be done profitably.

All of this has to be done on the side of my main business. Fortunately that business has improved a lot this year so I can take more time to do things like this. One big part of this was to “productize the services” by setting certain limits and requirements on them so that I can sell them more like products without having to spend as much time doing everything differently for each customer. That has made things simpler for me and my employees. Another part is a marketing plan that I’m rolling out now to get access to more customers. Combining a simpler business plan with more customers is always good :) Even though all these side products and websites aren’t directly related to my main business, each one is an opportunity to practice things that can be re-used in other businesses and in many other ways that I can’t even see yet.

New Goal

Based on this I think I can create a passive income of $750/month by the end of the year. One component of this will be the investment portfolio. With regular additions alone I expect this to count for about $500/month at year-end. The other part will be results from my recently-launched product and service as well as the new projects. I will only count the income net of any expenses so they need to create a profit of at least $250/month in the next 6 months.

Even getting to that low level of income will take a lot of work. But based on some things I’ve been reading recently and changes made this year, I am already working actively to get things started. I’m more interested than ever before in my main business so this isn’t about retiring to a beach. I just want to find the right combinations to create even more profitable assets. This chance to practice marketing skills and build more businesses is very motivating for me right now.

Financial Ratios Revisited

I recently started tracking a few ratios that show how well we’re managing our finances. In the months since the last update we haven’t made any major changes, but we have seen some improvements anyways.

We now have the following monthly ratios:

  • Investment savings (actual investment amounts and mortgage principal payments, all of which reduce our future income needs): 49.9% of net income (was 48.6%)
  • Total savings (investment savings plus things such as saving for the next vehicle we will need and the anticipated monthly increase in our general cash account): 63.2% of net income (was 60.9%)
  • Core living expenses (what we would need each month to live a normal life without mortgage payments or extras such as vacations): 27.8% of net income (was 27.7%)
  • Investment savings / core living expenses (what we invest compared to what we spend on ordinary living expenses): 179.8% (was 175.5%)
  • Housing costs / gross income (similar to the GDS used to qualify for a mortgage): 16.6% (was 16.4%)

Part of the reason for the change is that we removed a small source of part-time income. A lower income makes most of these ratios look a bit better since we are still saving and investing the same amount. However we’re starting to get some real momentum too. As our regular mortgage payments increasingly go towards the principal, the investment savings ratio has nearly reached 50% without having to change our monthly cashflow.

In our investment portfolio we’re also seeing momentum. When I look at it I can’t remember why it’s so high since the market gains are carrying it further than our own contributions. Even thought it’s only a fraction of the way to our goal we’re starting to see the rewards.

One of the places that shows up is in the other ratios:

  • Investment portfolio total value / mortgage balance (how close we are to having investments worth more than our loans): 45.8% (was 30.3%)
  • Estimated investment income / core spending (how close we are to paying the bills without working, not counting the mortgage): 19.3% (was 13.2%)
  • Net worth gain over the last year: 55.0% (was 53.9%)

These are looking a lot better compared to the start of this year. It shows the growth of our portfolio, and once again I can’t explain why it’s grown so fast even though we are investing a lot every month. At the end of the year I estimate that our portfolio will be around 2/3 of the value of our mortgage assuming markets don’t rise anymore. That would give us a nice level of safety, and by the end of next year our investment balance could be greater than our mortgage balance (less than 4 years after buying our house). It could also be enough to pay about 35% of our core monthly expenses.

For some reason, Quicken is saying we have less than 15 years left to pay off our mortgage which is shorter than I expected. Either way that isn’t a priority for us now since I believe that investing as much as possible will give us more freedom.

We’ve recently started watching our spending more closely and made a one-time extra investment this month, so the total amount we put in this month was nearly 4 times the usual. We may be able to increase our monthly investments later this year without taking more income. My business income also looks like it may turn up by the end of the year, allowing further improvements. But even without any of that the gradual improvements in our mortgage payments will inch us over the mythical 50% savings rate. Will we be able to make it to 55% this year?

For years it’s seemed like we worked hard with little results to show for it. Now we’re starting to see them.

You Need To Aim Higher

Since I graduated from university years ago and decided not to get a job, I’ve spent a lot of time learning about two things in parallel. One was “online income”, with things such as PPC, affiliate marketing, and blogging. The other was a service business. My lifetime online income amounts to less than $10 (not counting a website that a bought for $1000 and barely made back the cost of purchase before it stopped earning an income). I decided years ago that the best use of my time was my other business which has provided a good income for my family and now employs several other people.

This might lead you to conclude that online income is just a pipe-dream promoted by hustlers who are looking for an easy audience to scam. While that’s certainly true in some cases I believe that the opposite applies to many others. Witness the many articles that talk about reaching 6 figures in online income like this is some kind of mythical unicorn that no one has seen.

The truth is that whatever you create, whether it’s a new blog with 1 post and 2 affiliate links or an empire of 50 sites that get 1m visitors per month, you are building a business. That business can do one or both of two things: sell your time to the highest bidder, wherever they are in the world, or sell something that doesn’t depend on your time. In both cases there is a lot of potential. Whatever you are selling there is someone, somewhere, who can make a lot of money from it and can pay you well.

The mistake most people make is that they compare this to income from a job. In that context someone who is young and earning $60-100,000/year might think they have reached the limit because that seems like a lot for a job. But when you realize that they are starting a business and not just a job numbers like that are too low to even be on the charts. A couple of years ago I went to visit a prospective client in the US, which was a company of 100 people. On my return a friend commented “over there, they call that a tiny startup”. Turn your thinking in this direction and the possibilities become much larger.

I don’t want to diminish anyone’s accomplishments. It is a great step to show that you can create something yourself and not rely on a narrowly-defined job. I’m cheering for anyone who does this since I’ve never been able to live by someone else’s rules. For some people that is enough, and a good place to stop. But thinking that there is some kind of inherent limit in numbers like that is a big mistake. There are always people who are willing to pay more for what you sell and many others who want to buy it if you can find a way to scale up.

Whether you know it or not, when you create something where you don’t have a boss you are creating a business. It could be a marketing businesses, a trading businesses, a retail businesses, a trend-following businesses, a service businesses, or a business-to-business business. And in the world of business, bringing in $100,00/year is the table stakes. Unless your business is so big that your name is printed in the newspaper every day there are many ways you could grow your income by 10x.

Of course that’s before expenses which are everywhere in business and frequently overlooked when people talk about online income. You need to make sure you are establishing a sustainable profit margin in your business. Otherwise you are just giving away your work. At times you may accept a lower profit margin to grow faster but you need to know that it will be worth it in the long run.

I’m not someone who needs a $1m income just to get by. In fact that that rate I expect I would need to work less than a year in my life. But if such a need comes up I know the pathways to get there. Learn the ways of business and you will have no limits.

Passive Income Update: Still Waiting to Start

My original passive income goal set back in August was to build up to a level of $500/month, starting from $223/month. In the time since my last update I have kept doing what I do well and gotten up to $325.69/month. This is the current status of each part of that original goal:

  • Investment portfolio and interest income: this counts for $324.69/month. By the time of the deadline this should be producing at least $375/month, or higher if we can invest a bit more along the way. This is going well because we’ve been doing it for a while and we know how to step it up. The other things are going slowly because I don’t know them as well yet.
  • My blog with adsense: the $3 click I got a few months ago was an anomaly. So far this is worth about $1/month. I haven’t been active on the blog or the Twitter marketing I’m trying out but I should be freeing up more time to write regularly and increase the traffic (and thus the revenue).
  • Product #1 (partnership with blogger): a couple of months ago I learned that the blogger I was working with was no longer interested in launching this product under his brand. I understand this because it’s not really like the things he’s doing now and he has a lot of other opportunities to pursue. If he’s interested in using the product personally and setting up an affiliate deal I would still be happy to do that since the marketing exposure would be hard to beat. Since this was close to being ready I made a few final changes and released it last week. This means it’s available to buy but I haven’t gotten anyone to the website yet. My first marketing attempt was selling through another website that takes a 60%+ fee. I was rejected from there so I will carry on with the rest of my marketing plan. If I sell just 3 copies of this every month it will easily make up the gap to hit my goal.
  • Product #2 (service for small businesses): this is a lower priority at the moment. Once I run out of productive things to do on other projects I will come back to this. In thinking about it I remember what a potential customer said about a similar problem they were having. This gave me an idea for another related product that is much simpler to create and easier to sell (it directly makes them more money instead of just saving their time like the old idea). I think I will lead with that and then offer the original product as an add-on. This could be generating a bit of revenue by year-end.

You may be wondering why I don’t include the business opportunity I found recently in this list. Although that could potentially generate enough extra income this year to completely crush my goal without cutting into time devoted to other income-generating activities, it does look like it would require ongoing maintenance.

For my passive income goal I want to count only things that can generate a consistent (or slowly declining) level of income with very little upkeep once they are created. Anything else, along with the new services I want to launch in my main business to increase revenues, are just additional bonuses.

Business Opportunities Are Everywhere

Sometimes you hear stories of people who quickly create a profitable business seemingly out of nothing and make a lot of money. Are these one in a million stories, or scams? Is a unique skill that no one else has? No – a lot of them are just people who opened their eyes to the possibilities. I may have come across something like this recently in a perfect example of the type of unexpected opportunities that have launched many good businesses. With a little persistence you can find these just about anywhere.

I’m moving my business into an office but we’re in a very tight real-estate market so it’s been hard to find something available. It’s even harder because the space we need is too small for many property managers to bother leasing. I considered the possibility of getting a larger office and then setting up a co-working space, renting out desks or rooms to freelancers and small businesses, since those are becoming popular in many cities.

I decided not to do that for several reasons. Signing a long-term lease or buying a building is a major expense I can’t take on now. I don’t have a lot of time to market and promote a co-working space and try to build a community with events to attract people. The margins seemed small since everything was expensive already and it would be hard to pass on an even higher price to customers.

So I decided I would just look for an office suitable for my business. Finally after trying some slightly unconventional tactics I found something that shouldn’t exist: a large unused space in a great downtown location where I can rent a small portion at a very low cost (no more than half the market rates) without needing a long-term lease. That’s one example of a deal that you just can’t get… unless you look a bit.

It gets better though. Another place I looked at was a co-working space someone else was setting up, at a location I had considered a few months earlier and rejected. I thought the prices they were talking about were well above the market rate, but I recently heard that it quickly filled up.

All of this adds up to a very interesting opportunity. I can rent office space at less than half the market rate, and it’s clear that there is demand from others who are willing to pay above market rate for individual rooms or smaller spaces. I don’t need to tie up $500,000 or $1M to buy a building because no one is using the space now, so I can work out a deal to only pay for the parts that are actually generating revenue. My friend is renting out a few offices in her building and I’ve learned what she does to keep them occupied so I can probably find customers without spending a lot of time.

I still need to test my assumptions but this is looking like a very interesting business opportunity. It may evaporate in a few years if demand dies down, but if I can make a profit with very little risk that’s worth a try. This kind of opportunity isn’t easy to find but if you know where to look sometimes it does come up. You just need to be aware of the problems that you and other people have. My difficulty in finding an office space shows the demand in the market, and a building owner who doesn’t have time to manage it creates a unique supply.

A deal like this exists on the margins of what is possible and may not last for long. But once you start down that path it becomes easier to leverage what you have into different suppliers, customers, and/or products to create a business that can go much further. An example of that is documented in The Fish That Ate The Whale, which tells the story of an immigrant who started off by selling a product that was about to be discarded after noticing it on a dock one day and grew from there to control the majority of the market (not to mention overthrowing a few pesky governments, which led to the term “banana republic”).

I’m not interested in commercial real estate management at the moment so I have no grandiose plans. I’ll just take the easy profit while it lasts. All the same I might learn more about profitable ways to put my future capital to work. If you look at this there are all kinds of reasons to believe that it doesn’t exist or it can’t work. Many well-known businesses today are a testament to the fact that such popular views are wrong.

Making Saving More Exciting: Early Results Are Good

One of the biggest reasons people don’t manage their finances well is that it takes a long time to see the payoff. Most people can understand the idea of investing for the future but when you start off and you’re getting $0.30/month from your investments while your friends are whipping out their iPhones that’s not very motivating.

This year I came up with the idea of combining smaller wins with an old fundraising tool. I started to track an estimated income from our investments and used a spreadsheet to make a “thermometer chart” to show how much of our expenses this covers. It’s more of a brick than a thermometer but it shows our progress.

That’s still not very motivating since no one gets excited about being 3% of the way there so I moved the goal line. Instead of tracking it against all our expenses I started off comparing it to our utility bills (heating, water, power, tv/internet, and phones). And then I added a running start by including the full value of the bills and adding a monthly re-payment from my business (since I use some of these for business with my home office) to our investment income.

I’m well aware of how much I’m cheating here but the results are accurate. This shows us how much of our utility bills we still need to work for. I organized these from smallest to largest so we could knock off a few quick ones. For example we could say early on that we never had to work to pay for the heat or water again. At first our plan was that everything but our phone bills would be covered by the end of this year and our additional savings next year would cover that.

We’ve managed to take a few extra steps this year and got ahead of the plan. By the end of the month we’ll be more than half-way through the amount needed to cover the phone bills and we’ll reach that full amount in another 6 months just from automatic transfers. If we do anything extra we’ll get there even sooner.

We look at the chart every 1-2 months so it’s been a constant reminder of how things are moving forward. I’m not sure exactly how much it helped since I am naturally motivated to invest. But seeing visible progress every few months made it more real and gave us results that are easier to see and understand.

Once we reach an amount high enough to cover all our utility bills that will give us a real accomplishment to celebrate even if we still need to work for another decade or more. At that point I’ll expand the chart to include some more expenses. I think an ideal would be to make the next target twice as high so I’ll find a few more categories to reach that.

Food would be a natural next step since it’s important but our current food spending is about 50% higher than our utility bills so that might be too big to add now. We’re hoping to reduce that average cost so maybe it would work. Or the new goal could be a combination of smaller things such as property taxes, regular car expenses, and personal care. That would create more steps to reach along the way even if it adds up to the same amount.

Still food may be the best thing to add. If we can say in a couple of years that our investments are enough to pay for our bills and our food, that doesn’t leave a lot of ongoing essential expenses. Having a bigger goal like that would be a motivation and a challenge to do more which makes sense since we still have a long way to go and we need to work hard for it. It might even lead us to spend less so we can move the goal closer.

Overall this is a great way to track your progress and even more useful when you have to explain it to someone else and help them to share in your motivation. Maybe it’s the long-awaited trick to help reach smart goals after someone has paid off their debts. Paying off a $20,000 credit card balance in 2 years is easy to understand. Paying off a mortgage is harder but still a visible goal. When you set goals this way you can pay off all your living expenses one by one and then truthfully say that you never need to work for them again.

Starting a Business is Easy

Many people think that it’s hard to start a business and you need a brilliant idea. I have mostly followed an approach that’s pretty much the opposite of that. I recently joined a mastermind group with others who are dedicated to pursuing the easy approach to business so we can further refine and practice these ideas.

The “business ideas” you see on TV that seem like a lot of work and a big struggle are really just examples of bad business ideas. The reason they are so hard to do is that people do a lot of work before even knowing if anyone cares so most of their work is wasted. And as a result they are very likely to end up going down a path with results that are mediocre at best. Lots of work + weak results = bad idea.

The way I approach it turns everything around. As Ramit Sethi likes to say you don’t need a business card, a website, or a twitter account. All you need to do is talk to people until you find someone who needs help and will pay for it. Once the first person pays you, you have a business.

Then you keep telling stories about how you have helped people. By doing this you will find more people asking for help. Over time as you get a better idea of what people need you for and the demand grows, you can raise prices. If you discover new needs along the way you figure out a way to sell something for that. When things are really rolling along you can start hiring people to help you and make sure you have the right profit margin to support that.

Keep doing this and you’ll get steady growth in your business. Keep up the steady growth and you can get it to any size you want. There are challenges along the way, but if you keep an open mind and you stay as flexible as you can for as long as you can, you can take it anywhere you want. Keep trying new ideas along the way and you can build up new lines of business to grow faster. Even large corporations will go down quickly if they forget these principles.

And that’s all you need to know about starting a business in 300 words.

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