Size of the Pie

“Continuous effort – not strength or intelligence – is the key to unlocking our potential.” – Sir Winston Churchill

Creating wealth comes from these two simple steps: 1. Spend less. And/or 2. Make more money. There are many personal finance sites that discuss ways to save money and curb expenses. And these are important lessons. For me personally, it is easier to make more money than try to train myself to cut back on my current standard of living.

Terry Savage at MSN Money writes, “Certainly, you can affect your personal balance sheet by spending less money dining out or on entertainment. Making a pot of coffee at the office instead of buying a $3 latte will make a slight difference in your cash flow. But the big difference is usually made on the income side of the ledger.”

“Stop looking at your budget as a fixed pie that must be cut up into different size pieces to cover your regular bills for housing, telephone, electricity, car expenses and insurance. Instead, concentrate on thinking about how you could expand the size of the pie. Sure, you could ask your boss for a raise. But that's a less likely prospect than figuring out how you could earn more money on the side. Take a look at how you're spending your time, as well as your money.”

Robert Kiyosaki describes “three types of income:

Earned Income: This includes income derived, generally, from a job or some form or labor. In its most common form, it is income from a paycheck. It is also the highest-taxed income, so it is the hardest income with which to build wealth. When you say to a child, "Get a good job" you are advising them to work for earned income.

Passive Income: This is income that is, generally, derived from real estate. It can also be income derived from royalties from patents or license agreements. In approximately 80% of passive income scenarios, the income is from real estate. There are many tax advantages afforded with real estate investments.

Portfolio Income: This income is generally derived from paper assets such as stocks, bonds and mutual funds. Portfolio income is, by far, the most popular form of investment income simply because paper assets are so much easier to manage and maintain than other types of investments.”

Much of the discussion at Sitting Pretty is about passive income. Passive income is based on a formula. Execute on the formula and you will achieve financial independence. By the way this has nothing to do with the real estate bubble and buying speculative properties, rather it is about buying income producing properties that produce positive cash flow each month.

My goal is to have ten rental properties and pay off the mortgages by the age of 65. This would result in $10,000 -$12,000 a month from rent checks (this is after expenses and based on today’s rents… and rents will increase over the next 25 years). Not a bad way to enjoy retirement.