I’m in My 20s and I Want to Live off Passive Income by 40 (This Is How I Plan to Do It)
The strategy is simple: keep working hard, keep learning and keep investing
Financial freedom is having enough money to afford a comfortable life for oneself or one’s family. I plan to do that by living off investment return by the time I’m 40 so I can focus my time on making a difference. This article is a guide for the busy professional who, like me, also wants to achieve financial freedom.
In high school, I sold clothes and accessories online. In college, I interned for companies small and large. After graduating, I worked for our family’s real estate enterprise until today, and I’m about to finish my master’s studies in entrepreneurship. Business books, conferences, sound advice and failure taught me everything I know today about investing. Everything I share with you is straight from experience.
To invest is “to commit money in order to earn a financial return.” Before you do that, you must first earn the funds you need to invest. But let’s assume that your salary will be used to pay for necessities. This requires you to look for additional ways to earn.
First, learn how to sell.
In sales, opportunities are endless. How successful you are is a factor of how hard (and how smart!) you work, which makes it a great starting point for learning and earning. I started selling property right after college, and it was so rewarding that in my first year, I was ready to invest.
If sales is not for you, consider having alternative streams of income.
Maybe you can do freelance work on weekends like photography, content writing or makeup artistry. You can also open an online shop that sells clothes, jewelry or baked goods.
Having a side hustle lets you develop confidence, self-leadership and entrepreneurial savvy, all of which are instrumental in helping you achieve financial freedom.
Invest in yourself.
When I was selling property, I attended every seminar and conference that helped me become a better salesperson. I spent one to two hours each day reading or watching online courses. I attended seminars where the attendees were about twice my age. I was obsessed to know what I didn’t know and that persistence put my performance a cut above the rest.
Start with these topics to develop your entrepreneurial savvy: sales, marketing, personal finance, effective communication, problem solving and time management. Remember, an hour of learning a day is seven hours a week. In a month’s time, you can jump from novice to expert. Discipline is all it takes.
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A thought popped up while writing an article about personal finance and investing. It is wiser and more empowering to make decisions independently. To do this, we need to fill our knowledge gaps which require time and effort but yield priceless return. New knowledge builds on prior knowledge, and when the two come together the novelty of ideas is exponential, not to mention catalytic when the right opportunities come. Education is the best investment there is. Make it your strategy. ✨
Understanding the concept of return.
Simply put, return (sometimes called interest) is how much you earn for every peso you put in. For example, a certain type of investment yields a return of 10% each year. If you put in P100, you earn P10 at the end of the year.
Ideally, you want to invest in something that yields the highest return, but often, higher returns come with higher risk, which means more uncertainty in getting returns. Higher returns may also require you to put in more money (sometimes called capital).
Also consider how soon you want to get your returns:
Short-term investing is when you want to earn your returns in a year or less.
Long-term investing is when you’re willing to hold the investment for several years to earn a higher return.
My five years of investing experience taught me the following:
Education breeds clarity, which then breeds confidence in the face of risk. Because I took my time in studying my options, I made sound investment decisions.
But I also made costly mistakes, which I count as learning experiences. Instead of constantly relying on expert advice to make every move, I try them out firsthand to sharpen my instincts and build expertise. Without constant trial and error, I wouldn’t be writing this article.
Remember: your greatest investment is yourself because it yields a lifetime of return.
Knowing different types of investments.
Now that you’re aware of the key concepts, let’s dig into common investment products and vehicles, all of which I currently own.
1. Digital Banks
Do you know that you earn from your savings account in the form of interest? You just don’t notice it because it’s negligible, often only between 0.1% to 1% each year. Digital banks such as GCash, CIMB and ING, however, can afford to pay out an interest of up to 4% each year, four times what you earn from a traditional bank account. This is the future of banking.
Open an account with just a mobile phone and internet connection. Track all your payments on a clean mobile app. Take out and put in money at any time, which is something you can’t do with other options in this list. (This is not a paid article, I’m just telling you why I think they’re awesome!)
2. Mutual Funds
This is when a group of investors pool their money together to jointly invest in stocks, bonds or other investment products. A fund manager chooses which products to invest the money in and guarantees a percentage of return. Unlike banks, funds have a holding period which often ranges from 90 days to a few years, during which you cannot take your money out.
Given that digital banks can yield 4% in yearly return, it makes sense to invest in mutual funds that guarantee a return of more than that.
Nowadays, insurance companies offer Variable Universal Life (VUL) policies, which are life insurances and mutual funds in one product. Banks and other financial institutions offer mutual funds, too. Just be sure to place your money with a reputable company.
3. Stocks (or Shares)
Imagine a company as a pie. It offers one half of its eight slices to the public (anyone who wants to own part of it) in the form of four shares. If you own one share, you own 12.5% or 1/8 of the business. (Most companies don’t offer this much of their business to the public, however.)
To get a share, you have to buy from an existing shareholder through an authorized seller (also called a broker). Then you can earn in two ways: by buying then selling shares at a higher price or by buying then keeping the shares and earning dividends, which are a portion of the company’s profits.
Stock investing may be overwhelming to the novice. It takes prudence and business sense to succeed in this pursuit, so make sure you’re ready to commit time and mental effort for this to take off. Otherwise, it might be best to leave it to experts by investing in mutual funds.
4. Real Estate
Property investing gives returns in two basic ways, by buying then selling at a higher price or by buying then renting out for monthly recurring income.
For the most part, buying property often requires a large down payment but very good deals come every now and then. This is why you must be careful when talking to property sellers, who may pressure you to buy too soon and withhold certain information from you. Like I said earlier, the more knowledgeable you are, the more firm your decision will be.
Starting a business requires more than just time, effort and money. It needs to have one crucial ingredient: passion. Without it, there is no long-term success; when luck plays its cards, it’s passion that gives an entrepreneur the chutzpah to pull through.
Business may be the most complicated of all the options, but it is equally the most rewarding one.
Invest, reinvest, repeat.
The key to financial freedom is to keep reinvesting your returns. You may choose to invest in one or all five of the options above, but let no extra cash stay “idle.” If you don’t have a use for it, always put it somewhere you can earn.
Finally, let this be your biggest takeaway.
The road to financial freedom is not linear. It goes up, down and around, just like any meaningful journey, so beware of anything that promises you a one-shot deal to success. Believe me, it is never that easy.
The strategy is simple: keep working hard, keep learning and keep investing. When we enjoy the process while keeping our eyes on the goal, there is no limit to what we can achieve.
Words Hannah To
Art Mathew Fetalver