Everything we have talked about so far, from killing debt to job magic to secondary income streams, leads you here. Now that you are making money, it is time to learn how to make your money make money. This is the stuff that will start to build wealth exponentially when you are younger; more importantly, it is the type of income you will need when you retire. This is the stuff that makes the difference between retiring at 65 or earlier and spending your days enjoying life, or spending your golden years as a greeter at the local Walmart.
Income you receive on a regular basis with little to no time required to maintain it is called passive income. Passive income can be made through investing and through business. Because most people will already be somewhat familiar with investing, let’s start there.
Introduction to Investing
If you are an adult and you only have money in a checking account and a savings account, you are screwing up. Royally. Everyone should have money set aside to invest. If I could travel back in time to my 18-year-old self and only had 2 seconds to transmit a message that I knew he would follow, it would be to invest early.
As a child of Generation X, when I was in my 20s, I and just about everyone I knew was what was then referred to as a slacker. Being a slacker, I, like many of you, thought that my late teens and 20s were not the time to worry about such things as investing. By my early 30s I had a 401k and Roth IRA, but still had no real idea of what I was doing. Now, in my late 30s, I am kicking myself for being so stupid. Why am I stupid? Compound interest.
Compound interest is magic. It’s beautiful magic. If you are in your early 20s I urge you strongly to scrape a few bucks together to intions.g. Your 38-year-old self will thank you for it. Your 65-year-old self will kiss you for it.
For those who have no idea what compound interest is, the idea is simple: The interest on an investment is added back to the principal so that you earn interest on the principal and the interest earned up to that point. So if you invest $2,000 in a year in an IRA or portfolio that pays 8 percent interest (slightly below average for an index fund that follows the market), you will have $2,160 the following year. The next year you will earn interest on the $2,160. It grows exponentially every year, but you don’t start getting into the jaw-dropping numbers until several years down the road—thus the need to do it early.
Let’s take the example of $2,000 invested in an index fund when you are 20 years old, which is then left on its own in a fund that compounds once per year. You do not contribute anything else but that original $2,000. Let’s take a look.
1st year—age 21: As I said, at 8 percent interest, you wind up with $2,160.
2nd year—age 22: Your $2,160 earns interest and becomes $2,332.
5th year—age 25: In five years you have $2,938.66; you made $938.66 for doing nothing but leaving $2,000 to sit for five years. That is almost half of your principal. But wait, it gets better!
10th year—age 30: In 10 years at age 30 you will have $4,317.85. You made $2,317.85 by letting $2,000 sit untouched. Talk about easy money.
20th year—age 40: In another 10 years at age 40 you will have $9,321.31. You made more than seven grand for not doing a damn thing but leaving money to sit in an account! But wait, what if you wait the full 45 years until you retire at 65?
45th year—age 65: You now have $63,840.90!
Now here is the rub. If I wait until I’m 25 to make that initial $2,000 investment, just five years later, I only retire with $43,450. That five-year wait cost you almost 20 grand! You feel stupid now, don’t you? Me too.
Automate Your Savings
Of course, you won’t be putting $2,000 in an account only once. Just as you have your taxes automatically taken out for you, you should go to your bank and set up an automatic withdrawal to your savings account that happens every time you get paid. Get that money out of your Mercurial checking account where the money is used for day-to-day things and into the Jupiterian palace of your online savings account, where more long-term thinking happens.
By having the bank automatically move the money every pay period, you take the human element out of the decision. Similar to your taxes, you cease to obsess over it because it is just gone.
Using the same rate as before, if we manage to invest just $2,000 a year, every year, here is what our investment looks like:
1st year—age 21: It’s the same: you wind up with $2,160. Total investment of $2,000.
2nd year—age 22: Your $2,160 earns interest and becomes $4,3d btal20. Total investment of $4,000.
5th year—age 25: In five years you have $12,454.18. Total investment of $10,000. It’s only a gain of $2,454.18. Still not that impressive, but look what happens in another five years.
10th year—age 30: In 10 years at age 30 you will have $30,971.33. Total investment of $20,000, but you made $10,971 in interest. Now we are getting somewhere!
20th year—age 40: In another 10 years at age 40 you will have $98,155.33. You have invested $40,000 but you made $58,155.33 profit. Yes, it took 20 years, but you just made $50,000 for doing nothing but putting away a relatively small amount of money.
45th year—age 65: You now have $830,123.12. Total investment of $90,000 from you over the course of your career gets you $740,123.12—nearly three quarters of a million dollars!
Of course, you will not be investing just $2,000 a year, because with the information from the previous chapters you will have a lot more to put away than 6 dollars a day. Go to www.moneychimp.com and play with the compound interest calculator. If that doesn’t give you the motivation to invest, nothing will!
Don’t get discouraged if you are not young, though. Whatever age you are, invest now. If you are 65 you can still invest! Remember, that $2,000 a year becomes $58,000 after 20 years, and chances are you will still be kicking around at 85 years old.
How to Start
So how do you start socking money away? Well, different people have different strategies, but you start where the free money is. I consider the following two steps to be no-brainers.
1. 401k—Your 401k at your job is the first place to invest. Max it out. You are investing money before income tax and only pay taxes on what you withdraw. This is especially true if your employer does matching contributions. Why would you turn down free money? If you are not maxing it out, you are missing out on free money!
2. Roth IRA—Tax wise, Roth IRAs are even better than a 401k. You pay taxes on what you put it in but pay nothing on what you withdraw. Looking at our previous example, you would pay taxes on the initial $2,000 a year, but pay nothing on the $830,123.12 at age 65! That is huge.
Stocks and Bonds and Balance
I am not going to get into targeted investing and individual stocks here. Different people give different advice, and I do not want to get out of my depth. There are different strategies, most of which have been shown to succeed or fail at a similar rate. It is largely a matter of how comfortable you feel.
In general, as with most things in business, it is a matter of balancing risk and return. Money in stocks can return 10 to 11 percent per year, but the risk is high. Bonds are much safer but have an average return of 5.2 percent; still better than your savings account, but not by much.
Some will tell you that you should have a financial advisor or fund manager handle this for you—they are the professionals, after all. Others will point out that most of the time these advisors fail to beat the market average, and get paid for doing something that could better be accomplished with a computer program. Some will tell you to diversify heavily so that during recessions and crashes you do not get wiped out. Others will tell you that focusyoue invesing on a few investments will force you to look closely at the market and make decisions that will ultimately yield more. Some people like to gather all their assets into the middle of the road, while others use a barbell strategy to hedge their bets—keeping some money in extremely high-risk targeted investments and the rest in extremely safe treasury bonds. Whatever you do is up to you. Get educated and get invested.
In the previous example I used an index fund because they reflect the market itself. Unless you are in love with the markets, choosing your own stocks is something you won’t want to spend time and energy doing. Mutual funds, by contrast, are chosen by professionals, and thus have hefty fees to pay the salaries of the experts—most of whom, as I have mentioned, fail to beat the market overall. Index funds are chosen by computer to allocate assets according to the overall market. Investing in several index funds gives you a comprehensive view of the market. At the end of the night when you are listening to Money Market on NPR and they tell you the Dow and S&P did X, you have a pretty good idea of what your investment did as well. Of course, I strongly recommend not listening to such news on a daily basis for that exact reason.
As you get older your asset allocation will change because you will start accessing your investments and will need them to be much more stable than when you are younger. This is where the mix of bonds vs. stocks vs. cash comes in. When you’re younger you want a higher percentage of stocks to bonds and cash because they earn higher interest and you have years ahead of you to make up any losses. The market does well overall. As you near retirement you want a higher percentage of your assets in cash and bonds because they are safer than stocks and you will need to access the money sooner rather than later. If you can’t be bothered changing your asset allocation based on your current age, then invest in lifecycle funds—index funds that allocate your assets based on age. Ramit Sethi, author of I Will Teach You to Be Rich, points out that if more people had lifecycle funds, not as many retirees would have gotten wiped out during the 2008 banking crisis because the funds would have automatically allocated a lot of their assets to bonds by that point.
Okay, now that we have a handle on investing, we can get down to talking about sorcery. In most cases this is a two-step strategy:
1. Divination about the funds and amount of investing you do
2. Long-term macro-enchantment aimed at the overall health of your portfolio
That is all you do. Don’t screw with it outside of that. Unless you are a day trader, Forex trader, hedge fund manager, or other type of professional broker, anything more than this is overkill. If you do fall into one of these categories you fall beyond the scope of this book. I do know of a cabal of sorcerer/traders who use my multiple-divination—type intelligence-gathering strategy, which I presented in The Sorcerer’s Secrets, to choose stocks. They have gotten back to me with some promising field reports, but trading is their passion. For the rest of us, it’s divination and macro-enchantment—specifically, invocation.
There are a lot of beings that you can invoke to look over your investments. Certainly Jupiter and Mercury both would be appropriate, as would Habondia, Ganesha, Dzambhala, and the spirits mentioned in this book. A great friend of mine who is a successful investor uses Baphomet.
Baphomet is a much misunderstood figure who has been confused with Satan by both opponents of the occult and by some Satanists themselves. But in fact, Baphomet is something of an alchemical anaut figure representing the great work, and is also the anthropomorphic representation of life itself. The name has many possible origins, from a corruption of Mohammed traced back to the crusades, to “The Baptism of Wisdom” (Baphe Metous), which is the interpretation I prefer. The most famous representation of him was made by Eliphas Levi, showing him with a goat’s head, cloven hooves, wings, breasts, a caduceus, an upright pentagram on his forehead, and a torch extending from the top of his head. His arms are tattooed with the words solve and coagula, which means “dissolution” and “coagulation,” indicating his alchemical nature.
It is this alchemical nature and his connection to the ebb and flow of life that makes Baphomet ideal for influencing the stock market, which is, after all, linked to the actual feelings, thoughts, and habits of billions of people all over the world.
Other Types of Passive Income
Last summer I met a friend of a friend at his beach house on Long Beach Island. We got to talking, and he told me that he was a fireman close to retiring, and had been a fireman all his life. Knowing that owning a beach property in addition to another house in New Jersey is not cheap, and that firemen are not widely known for their vast wealth, I asked him how he managed to swing it. Turns out that apart from working as a fireman he also owns a bagel shop. Note the different words: he works as a fireman; he owns a bagel shop.
His job as a fireman is like many people’s jobs. He spends a full work week doing his job in exchange for a regular paycheck. He is working for his check, just as most people are. The bagel shop is another story. He doesn’t work there. He doesn’t even manage it. He owns it. Other than stopping there once a week for bagels and giving any weekly instructions to the manager, as well as spending a few hours each quarter on paperwork, the money he draws from the business is not directly linked to his time in the way that a paycheck is. Remember that one of the qualities of the spirit of money is that it is linked to time. Someone working 80 hours a week for $70,000 a year has a relative income that is far less than someone who works 40 hours a week for the same pay. In the case of our bagel shop—owning fireman, the fact that the income he gets out of the bagel shop does not require a large weekly time investment makes that money incredibly valuable.
Owning a business that you do not work at is just one type of passive-income business. There are others. Though I hesitate to divide it up firmly, passive income usually falls into one of two categories: residual income and leveraged income.
People define residual income differently. Some people define it as income that streams in throughout a long period of time based on work done one time. The classic example is royalties from intellectual property. Although at the moment I am working hard writing this book, once it is written and published I am done with the work. From that point on I will receive royalty checks for as long as the book sells.1
This type of residual income also includes money from licensing a patent, commission for an insurance agent on automatic policy renewals, sales of e-books or DVDs from your Website, and so on. Anything that you work intensely on once, and then receive money from as it is sold or used in time is residual income. There may be small amounts of work required over time, such as packaging and mailing DVDs, processing payments, sending out e-mails, and so on, but to count as passive income, this should not account for anything more than an hour or two a week, possibly less.
The other type of residual incomeesie quali people speak about is income that remains from an asset like a house or business property, after the expenses are paid each month. In the case of my firefighter, he could choose to rent out his beach house when he is not using it. If he hires a local management company to take care of problems for him, then it truly becomes passive income. He does very little work to keep the operation running, but whatever remains of the rent after the mortgage, utilities, insurance, and management company are paid is the residual income from the operation.
Websites and blogs that make money from pay-per-click ads would also qualify. The money made after the hosting and marketing expenses is your residual income. In the case of a blog, it is less passive because you will be writing regular content, but you were probably going to do that anyway, right?
Leveraged income is income that leverages the work of other people to create money for you. Probably the most classic example of this is a contractor who hires subcontractors to perform the actual labor for him. Another example would be in a multi-level marketing scenario in which you get a commission of the sales from people in your “downline.” Profit that you make for referring sales leads for people, franchising a business, or selling a product through affiliates all would count as leveraged income.
In all these cases the strategies for magic are similar to those used for entrepreneurial work, but the magic is even more important because you will be more hands-off than you would in a regular job. Magic to drive sales. Magic to keep people that work for you honest. Magic to do viral marketing. Magic to protect your investment. There are a lot of things that you will not be overseeing yourself, and well-placed enchantments can go a long way toward making sure things run smoothly.
Of course, the thing about passive income is keeping it passive, so you don’t want to get obsessive about over-enchantment. You do, however, want to take care of business, so there is nothing harmful about making sure that you are not losing money or missing out on opportunities for growth.
If you are of the Baby Boom generation, chances are you are retiring now or are close to it. Congratulations. If you are Generation X or younger, you are probably used to jokes about how you will never get to retire because the Baby Boomers busted the system and even social security may not be there for you, much less a pension. The jokes are funny in a gallows-humor kind of way, but it’s a serious issue. Just because many people you know will be working until the day they die doesn’t mean that you have to as well. Think about how much you hate getting up early for work. Now imagine how much more that is going to suck when you are 80. Yeah…that is gonna suck. Let’s not do that.
At the time of this writing the Social Security check for the average worker is $1,177 a month—not exactly enough to live comfortably on. Even if the program survives until you reach retirement age, chances are that it will not pay much more. Given current increases in lifespan, there is a good chance that you will be living 25 to 40 years past retirement age. Unless you happen to have a state job with a solid pension, as with so many other aspects of modern life, retirement is something you are going to have to hustle for yourself. But hustle you must.
So what do you need for retirement? If you have been reading the book, you already have most of the puzzle. Get a good job, max out your 401k, start a Roth IRA, and automatically filter money into other investments, such as index funds and maybe an annuity.2 While you are at it, start a side business so that wnesg out hen you are 60 you can convert it into passive income that you manage from your condo in the Seychelles.
Magic? Well, I’ll let you figure this one out on your own. Whatever spirits you invoke are going to be secondary to the willpower it will take to start putting money aside for it, but like most things, once you get started it will become its own reward.
References and Resources
I Will Teach You to Be Rich, By Ramit Sethi (Workman Publishing Company, March 23, 2009). One of the best personal finance books on the market. Geared for younger people, but it still takes you to retirement and beyond.
The Only Investment Guide You’ll Ever Need, By Andrew Tobias (Mariner Books, January 5, 2011). Despite the title, it is actually more of a good start than the only book you will ever need. Still, it is a very good start.
Smart Passive Income Blog: www.smartpassivein-come.com. Great blog on developing passive income.
Moneychimp: www.moneychimp.com. Phenomenal resource on investing. Articles on everything from different funds to market volatility to the use of Fibonacci numbers in predicting stock prices. Also the place with the best interest calculators on the ’net!