My passive income march is starting to take shape, I have found a couple of great resources and mentors that have been successful at creating their own Financial Freedom through passive income and I am studying how they achieved their success and applying the strategies myself.

As there are naturally a lot of people looking at their financial situation at the moment, with the changes in mortgages, house prices and inflation, I am reminded of a story about peoples choices when it comes to looking for a return on their investment.

Oprah Winfrey had invited Robert Kiyosaki to be a guest on her fantastic daytime TV show to talk about Personal Finance and Raising Your Financial IQ. At a questions and answers from the audience session, one lady raised her hand and asked the question to Robert Kiyosaki:-

” I have $10,000 to invest, what would you advise I invest it in?” Oprah quickly responds, ” Robert, would you like me to handle this one for you?” She then goes on to ask the lady why she feels it is necessary to ask someone how to invest money, when she should be learning about it herself.

Now I know some great Financial Planners and Independent Financial Advisers who are experts in their field and I have done in the past exactly what that lady did and simply asked their opinion on what I should do with my money. I have also bought shares in companies I do not know exists, how many of us willingly talk to a broker, or buy shares online in “XYZ” mining company, when in fact we have never even SEEN the mine. It is all fascinating!

I spent a day recently at a seminar of 500 women, all had their own businesses and what struck me was the high percentage of those women who had found their financial circumstances had changed beneath them by events such as divorce or redundancy that had left them with a life to rebuild and a financial status that was fragile at best.

The reason I have chosen to carry out my own investing is because it is the provider of not only a sound financial independence of my own and choices for my family, but because I do not see why I should ask someone else to look after my financial future above myself.

~~~

source:http://witoo.wordpress.com/2008/05/24/why-do-people-ask-a-stranger-about-investing/

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Why Ask A Stranger About Investing?

There’s been a lot of posts on leverage lately in the blogworld so I didn’t think it would hurt to have one more…

Also – I’m in no way advocating anyone use leverage for investments unless they are comfortable with the extra risks.

Leverage is an instrument that almost everyone uses when they buy their house. Although most people buy a house to live in, not as an investment, it’s an example of where people are using leverage and they might not even realize it.

If you ask people on the street about how they feel about borrowing to invest they might give you a lot of negative feedback. I suspect this is a holdover from times when margin accounts were the only way to borrow for investing. The problem with margin accounts is that if your investments drop in value enough then you have to come up with cash to pay the difference which is why certain investors were running out of windows in 1929.

My opinion is that leveraged investing can be a useful tool but definitely entails extra risk. However it occurs to me that sometimes the idea of leveraged investments can be a question of semantics.

Consider the following:
Person A gets a $200k mortgage on his house with a 25 year amortization. After five years, his mortgage is $185k and he also has $10k in cash that he has saved. This person decides to invest the $10k into a dividend stock, let’s say…BMO. So now he has a $185k in mortgage and $10k of stock.

Person B also gets a $200k mortgage on his house with a 25 year amortization. After five years, his mortgage is $175k but he has no extra cash to invest because he has been making extra mortgage payments. This person decides to borrow $10k from his secured line of credit and buys $10k of BMO as well and gets the tax rebate on the interest paid.

According to popular wisdom, person A is the epitomy of responsible investing using good old cash to buy his stock. Person B on the other hand has made a deal with the devil and plunged into leveraged investing.

So what’s the difference between the two? The only difference I can see is that Person B can write off his interest on his investments and Person A can’t. Obviously there are interest rate differences but I’m ignoring those since they shouldn’t be too significant.

Moral is – if you don’t make extra payments on debt and use cash to do investments then you would be better off to put that cash into the mortgage and then borrow it out again for those investments and get the tax rebate.

And yes, I realize that this logic was the genesis of the Smith Maneuvre but rest assured that I don’t recommend that particular strategy.

~ http://www.four-pillars.ca ~

Original post:
A fine line between good and evil…

1. High Dividend Stocks

There are a lot of stocks that paying quarterly or yearly dividends. Over time, the power of compounding (with a little help from inflation) can substantially increase the value of your dividends. My mother bought the Indian subsidiary of Unilever (Ticker: UL) called Hindustan Lever about 20 years ago. She’s being reinvesting most of her dividends and today her annual dividends are larger than the value of the original stock purchase. American Capital Strategies (ticker: ACAS) has been growing its dividends approximately 10% every year. According to The Dividend Investor,

If we invested $100,000 in ACAS on December 31, 1997 we would have bought 6906 shares. Your first quarterly check would have been $1,726.50 in March 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $17,095 by December 2007. For a period of 10 years, the quarterly dividend has increased by 300 %. If you reinvested it though, your quarterly dividend income would have increased by 890%.

Yes, reinvesting the dividends in companies that have historically kept increasing their dividends is key. Even though you might get only 2.5% return today, eventually with the increase in stock price and rise in dividends, your annual return should be greater than 12%. This concept is very well explained in Prof. Jeremy Siegel’s excellent book, The Future for Investors, which I highly recommend.

2. Oil & Gas Royalties

While there is a lot of fraud and speculation in direct oil drilling programs, they can be very, very lucrative for investors. Charlie Munger invested about a $1,000 in such an oil drilling program in the 60s and he’s estimated that its paid out over $500,000 in royalty payments since then. Apparently it still pays out $2,000 a month. Of course, most people NEVER see these sort of returns, but for the average person, investing in Canadian Oil & Gas Royalty Funds (or Income Trusts) is the next best thing. I’ve invested quite a bit of money into both the direct oil wells and the Canadian Income Trusts (or Canroys) and the overall result has been pretty positive in both (which is in excess of 12%).

3. Royalties on Books and Patents

Royalties on Books and Intellectual Property Rights can be even more lucrative. However writing a best-selling book or creating a something thats worth patenting can extremely time consuming and expensive. For most authors and inventors, its a labor of love – something that they would pursue even if there was no monetary reward to it. But many ebook writers who sell get-rich-quick books about “making money online” are getting very wealthy. Most of these books are garbage and the only people getting rich are their authors and resellers. Not a very ethical way to make money.

4. Rental Income on Properties Bought at the Bottom of a Real Estate Cycle.

If you bought rental buy and hold property in California, Nevada, Arizona or Florida during 2005 and 2007, my heart goes out to you. A lot of smart people got suckered into buying at the top of the market and are paying for it. However, if you buy correctly, preferably at the bottom of a real estate cycle, real estate can provide excellent passive income and fantastic tax advantages as well. According to Charlie Munger at the 2008 Wesco Financial Annual Shareholder meeting, “most real estate investors don’t pay any income tax, except once every 20 years or so“. Bought correctly (that is based on value, not speculation), rental properties can provide a steady stream of cashflow that is somewhat inflation-indexed. I say somewhat, because in the short-term anything can happen, but over a long period of time, real estate is going to match the rate of inflation.

5. Investing In Timber

Similar to Canroys, there are companies that grow trees specifically for timber and pay pretty decent dividends. There are also direct tree-planting programs where you can invest a minimum of $5,000 and own a portion of a timber operation. The company does all the work for you and supposedly cuts you a check once a year after a specific time interval. The endowment funds of Harvard and Yale have apparently been investing in timber for several years now with great returns.

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5 Best Ways To Earn Passive Income

I am still reading Kim Kiyosaki’s Rich Woman and in the true Kiyosaki style she offers some incredible common sense “objection handling” to the common issues thrown up when it comes to why so few women have succeeded in obtaining financial independence either within a relationship or on their own.

1. I don’t have the time.

2. I am not smart enough.

3. I haven’t got the money.

Now as a mother myself, I can fully relate to the time factor involved with bringing up children, however I take on board Kim Kiyosaki’s viewpoint that if my life depended upon finding the time, I’d have found it somehow.

I concur with the viewpoint that men are not born smarter than women when it comes to finances, in fact biologically women are better equipped for investing than men. ( Kim goes on to show this .) I began studying investing over 12 years ago, when on regular trips to the USA & Canada I was amazed at the extent of personal finance books, business and self help books available everywhere compared to the extremely limited selection in the UK. ( So I bought several on every trip & changed my course.)

I have been guilty of waiting to hit the big deal, then start investing, and with money to invest too much too soon without first practising, I have set myself a small challenge this week of finding an asset ( something that pays me a positive cashflow ) this week for around £100. I am a massive believer in learn by doing, I have come through all the money management levels required in order to be free to invest in passive income so I will research what is available and do my due diligence.

If you ever come across the chance to play the Cashflow 101 game by Robert Kiyosaki then jump at the chance, you play the part of a Rat, trying to get out of the Rat Race. You collect your “Monthly Cashflow” payment and decide which small deals provide you with a positive Cashflow, when to convert those samll deals to capital gains to clear liabilities and when to purchase a big deal.

The object of the game ( and is highlighted throughout Kim Kiyosaki’s book ) is Financial Freedom is achieved when your Passive Income pays for your Total Expenses.

Source: http://witoo.wordpress.com/2008/04/05/financial-freedom-is-achieved-through-passive-income/

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Financial Freedom is Achieved Through Passive Income