This article describes in details different types of income that my family has including both Active Income and Passive Income. I also wrote about the future income source that I seriously consider, and various possible income streams which I am no longer interested in.
At this stage of my life, me and my wife are focused on ‘systematic and continuous wealth building’.
To know how wealthy you are, you need to calculate your Net Worth:
Net Worth = Everything you own – Everything you owe to others
Another name for Net Worth (or wealth) in the business jargon is Equity. On the Balance Sheet, it is calculated as:
Equity = Total Assets – Total Liabilities
We are not yet at the stage of ‘wealth preservation’. We still want to increase our Net Worth (or wealth) making the snowball bigger.
Types of income: Active Income & Passive Income
As mentioned at the beginning, my personal approach to building wealth over time is very simple.
Me and my wife earn Active Income. Then, from this Active Income we invest all our savings into those Assets that can help us to earn Passive Income. I call those Assets the ‘Income-generating Assets’. If we had more spare cash, we would just build a bigger snowball by investing in Passive Income-generating Assets that I consider the greatest: Residential Real Estate, Bank Deposits, Online Business, Index Fund ETFs and Dividend Stocks. They are an important part of my general investment strategy.
The following Active Income and Passive Income streams are the only income streams that I consider worth developing at the moment. Currently, I do not consider any other investments to put my money into. I simply do not think that there are any other proven ways of generating substantial amount of earnings that are as good as the following income streams that I am going to describe below.
So, when it comes to building wealth according to my general investment principles, I am investing in Assets that create value, increase in price over time, are very safe and relatively stable, generate predictable earnings and can last for a long period of time.
Active Income
1. FULL-TIME JOBS (A vast majority of the total income, approximately 75%). Your earnings are salary. I consider our full-time jobs as being a Cash Cow revenue stream for our family. Our jobs have already been found long time ago and are stable (as we have been doing what we are good at for the last 10 years), as well as these jobs produce steady cash inflows every month. Also, the companies that we work for are quite safe businesses. While a full-time job may not really be considered as Passive Income, selling some of our time for money makes sense in our case.
2. PART-TIME JOBS (A very small part of the total income, approximately 5%). Your earnings are wages. I also consider our part-time gigs as being a Cash Cow revenue stream because those jobs are fairly predictable and we also have been doing them for a few years already. You can check more about what I can offer in SERVICES.
Passive Income
1. RESIDENTIAL REAL ESTATE (A small part of the total income, approximately 10%). Your earnings are rental income. Realistically, you can expect to generate from this Cash Cow around 5% on average in annual returns after all property management fees, sporadic maintenance costs and TAXes.
2. BANK DEPOSITS (A small part of the total income, approximately 10%). Your earnings are interest. So, this income stream is our Star passive income source – it takes the biggest part of my free time and has already started to generate returns. Once all the bank deposits are set at the end of 2022, they will run pretty much on autopilot renewing automatically without any work required, therefore bank deposits will change from being a Star to being a Cash Cow.
3. ONLINE BUSINESS (Just starting, so 0% of the total income). Your earnings can be advertising, affiliate commissions or earnings from selling your own products or providing services. As of today, this website www.SuperBusinessManager.com remains a Question Mark revenue stream. It is consuming huge amounts of my free time and energy until it can be sufficiently turned into a Star, and then into a Cash Cow.
Next-to-Be-Income
There are also riskier options that I consider which include investing on the stock market. I have not started investing in public-limited companies yet, and I am not planning do it in the short-term though. Right now, I am busy with setting up all bank deposits, developing this online business, and educating myself how the stock market works.
1. STOCK MARKET (It will perhaps account for 10% to 30% of our Passive Income-generating Assets). Your earnings are dividends and capital gain. As of today, investing on the stock market is my possible Next to Be revenue stream. Once I start buying stocks in various public-limited companies, it will immediately turn into a Question Mark revenue stream consuming all my attention. I will need to follow up on Index Fund prices and share prices of individual stocks, as well as dividend yields for both. I consider both passive investing (buying Index Fund ETFs) and active investing (buying individual stocks). Here are the options that I consider grouped from less risky to riskier:
a.) PASSIVE INVESTING: Pension Funds in China. Pension Funds are interesting because they usually grow at a very stable pace at around 10% annually, are low-risk and charge around 0.6%-0.8% in annual management fees (much lower than actively-managed mutual funds). This is low-risk investment.
b.) PASSIVE INVESTING: Index Fund ETFs / Mutual Funds in China. I may consider investing in mutual funds in China, but only in those with very long history of growth (at least 15 years on the market with continuous growth). Some of those actively managed funds here in China grow as much as 100% annually, have great liquidity (takes around 1-7 days to sell your positions), but charge around 1.5% in annual management fees, and around 1% in ‘buy-in fees’, also called sales charge or front-end load. This is low-medium-risk investment.
c.) PASSIVE INVESTING: Index Fund ETFs / Mutual Funds in the US. I also consider so called ‘Index investing’ mainly in Total U.S. Stock Market Index Funds such as Vanguard’s VTI, S&P 500 Index Funds such as Vanguard’s VOO, BlackRock’s IVV or State Street’s SPY, and High Dividend Yield Index Funds such as Vanguard’s VYM or State Street’s SPYD. Those Index Funds also pay dividends. These instruments usually charge less than 0.1% in annual management fees. This is low-medium risk investment.
d.) ACTIVE INVESTING: Dividend stocks in the US. This is a dream way of investing in stocks for me because I can build another Passive Income stream generating around 2%-6% annually by buying shares of well-established multinational American companies listed on The New York Stock Exchange (NYSE) and Nasdaq that pay dividends monthly or quarterly. I consider mainly Dividend Aristocrats, a list of around 50 companies from the S&P 500 Index that have been increasing their dividends for at least 25 consecutive years. This is medium risk investment.
On the top of my list are 13 great long-term dividend-paying businesses. They are going to be my ‘foundation stocks’ to build the portfolio.
These companies are very large multinational businesses which have been regularly paying and continuously increasing dividends for decades. These companies also cover many important needs that human beings have: eating and drinking, communicating with each other, living in a household(s) hence using tons of energy, running a company(s) and needing raw materials, and also getting sick from time to time, unfortunately.
Healthcare: Johnson & Johnson (JNJ), Merck (MRK)
Consumer Staples: Procter & Gamble (PG), The Coca Cola Company (KO), Colgate-Palmolive (CL), Pepsi (PEP)
Consumer Discretionary: McDonald’s (MCD), Target (TGT)
Industrials: 3M (MMM), Emerson Electric (EMR)
Telecommunications: AT&T (T), Verizon Communications (VZ)
Utilities: Consolidated Edison (ED)
In total, I keep an eye on around 200-300 companies across all industries mainly from the US, Canada, the UK, Germany, France, Switzerland and China. All these companies are old, large and pay dividends.
Overall, there are is a mix of Cash Cows (3), a Star (1) and a Question Mark (1), as well as a possible Next to Be (1) revenue stream in my portfolio of income streams.
Too-Risky-to-Consider Income
I do not consider, or no longer consider, the following:
1. CURRENCY TRADING. Not long-time age, I gave up the idea of currency trading. I had been considered purchasing USD against RMB as the Chinese currency has appreciated approximately 10% in recent months. Another reason was that that the USD/CNY pair has quite obvious swings with appreciation or depreciation lasting for a few straight months. The exchange rate in China is ‘managed floating based on market supply and demand with reference to a basket of currencies’.
Originally, I had planned to start with very small amounts of USD$100 each purchase mainly to test myself as I do not have any experience with buying and selling currency to earn money. I thought that if I could earn between 5% to 10% annually from trading currency, that would be just fine. I had planned to only spend the Chinese RMB to purchase some foreign currency (e.g. USD, EURO, GBP) when RMB appreciates a lot against any of the foreign currencies to exploit opportunities to grab some of that foreign currency cheaply.
However, I finally decided that currency trading involves too much speculation. You have perhaps noticed that I am more of a value investor rather than a day trader kind of guy. Therefore, I am only interested in investing in Assets that grow in value over time, not in speculating on price such as currency prices, gold or Bitcoin. Trading currencies simply does not fall into the aforementioned criteria that I consider indispensable when investing because it is risky, does not create any real value, is not easily predictable nor stable. Also, in theory, money loses value over time due to inflation.
2. BONDS. Another idea I gave up is investing in bonds. Investing in bonds simply means lending money to other companies (corporate bonds), cities (municipal bonds) or countries (government bonds or treasury bonds). I am not interested in bonds whatsoever because of the risk of defaults. If a bond issuer (a company, city or country) defaults on its obligations, I will risk losing out not only on interest payments, but also getting my principal repaid, or both (in the worst-case scenario). I do not need to, nor want to, take that kind of risk. Also, I have always preferred to invest in equity (to own something tangible), rather than owning someone else’s debt.
3. NON-DIVIDEND-PAYING COMPANIES. I am not interested in investing in companies that do not pay a dividend at all. Not paying a dividend means not sharing company profits with shareholders (business owners). When I buy a share in the business, I am becoming one of the owners (shareholders) of that business, and as the co-owner, I am entitled to a part of its profit. It is because I believe that companies exist to earn profits for their owners.
4. START-UPS. I will not invest in risky start-ups either. It is because new start-up companies have it very difficult to generate first profits for years.
5. UNETHICAL BUSINESSES. I will never invest any of my family money in unethical businesses. It is because unethical actions mean troubles sooner than later – either legal or moral. If customers stop buying products from unethical businesses, sales revenue will decline below the costs meaning that the company will start making a loss, therefore there will not be any profit to distribute to the owners in the end. And the business will lose its value in the long term too.
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The above article represents my own views and attitudes as of June, 2021. It is not an investment advice. I am not an investment advisor. My articles have rather educational purposes rather than are advisory in nature.
Your money decisions are yours alone and I am not in any way responsible for your present or future actions. Stay on the righteous path, think long and long-term before making any financial decisions. And, remember to trade responsibly! More in DISCLAIMER.
