Previously I wrote an article on the 3 types of income. In case you missed the article, you can find it here. Today I will solely be talking about passive income and the power of compounding. Have you ever wondered why people like Bill gate, Warren buffet e.t.c are making billions of dollars day when they only 24 hours a day to work just like the rest of us. In fact most of wealthy people in the world didn’t make their money from doing work the way we think about it.
Most wealthy people rely on passive income to continue to build wealth through the generation.
WHAT IS PASSIVE INCOME?
Passive income are incomes which you get as reward for a job done in the past. Passive income serves as a reward for past efforts. It’s just like planting a seed in the ground, you do the work to plant the seed and then it just start to grow basically in an exponential way. Another great example of passive income is what investors get as a reward of their investment called COMPOUNDING RATE OF RETURN or COMPOUND ANNUAL GROWTH RATE (CAGR). The major feature here is the “COMPOUND”. This is a growth rate whereby the money you invested i.e (the seed you planted) is actually growing more money just like a seed starts developing more seeds. This is an enormous way of generating passive income.
Passive income is gotten from doing work originally which keeps growing. For if instance you can take 20% of your earned income and invest it in a very lucrative business or a security let’s say APPLE inc and your equity grows at 15% per annum, the income you get from such investment is what we call passive income. the greatest advantage of passive income is that you make money why you sleep and there is no limit to how much you can earn.
COMPOUNDING RATE OF RETURN.
The magic of compounding rate of return is that your initial investment stays in there why it grows at a certain percentage (let’s say 20% for instance), so your initial investment plus your previous percentage return is compounded. The compounded amount will now serve as your initial investment in the coming year. The amazing part is that with 20% rate of equity, in roughly 3 years your compounding should have doubled.
I always encourage people to take a percentage of their earned income (20% is the thumb rule) and invest in in good business and generate passive income with time. Because nobody has gotten rich by depending solely on earned income. I’m not saying you should go ahead and invest your hard earned money on any business. Take your time to investigate good/wonderful businesses before investing. Wonderful business by definition is any business which is able to grow and compound your money completely passively at a very high rate of return over a very long period of time. These businesses can do this simply because they are durable and have a better competitive advantage than the rest. There are a lot of wonderful businesses in the stock market, so all you have to do is to buy at a very good price. The reason you are buying at a very good price is to accelerate your passive rate of return.
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