Make Your Money Work for You - The power of passive income

Congratulations! You've made it to final step of my 6 step plan. You've set yourself far apart from the average person drowning in debt they'll never pay back without a plan for retirement. There's one powerful concept you must realize in order to become financially free.

No matter how much money you make in your current job, without passive income the minute you stop working you are broke.

It doesn't matter if you're a celebrity, doctor, lawyer or pro athlete... when you lose your job the money dries up and you're left with the bills for your expensive mortgage, car and everything else. Of course, you'll prevent credit card debt and give yourself time to find another job with an emergency fund, but in the end you're still shackled to a job.

The only way to break free and end your anxiety over losing your job is by building passive income. The simplest definition of passive income an investment that earns money without you being actively involved. While you're vacationing in Tahiti, your money is hard at work for you. When you decide to have a lazy Sunday and not leave the house all day, your money is still hard at work for you. It's how the rich build wealth without working longer and longer hours.

The concept is simple. If you match your current salary in passive income, then why are you working? The reason is because you enjoy your job. How profoundly does that change your outlook on life? Your goal should be to build passive income to a level that allows you the freedom to work when you want.

There are three main ways you can build your passive income:
  1. Rental income from real estate
  2. Dividends from stocks
  3. Income from a business you own
Obviously all of these require hard work on your part, but the beauty is once they're set up you just manage your money. Even if you leave your money is still working hard for you. If you decide to backpack Europe for a year you can hire a property manager or hand off control of your business to a manager. How do you think your boss would respond to such a request in your current job?

Out of all three methods, the easiest to start is dividend investing. It's a good way to get involved in the stock market. The basic premise is you buy partial ownership of a company in the form of stocks and in return the company pays you part of their earnings in the form of dividends. To get started you need to open a brokerage account with a company like Zecco. I use them for my non-retirement account because they have a free dividend reinvestment plan (DRIP) and give you free trades once your account reaches a certain value. Not to mention they're cheap at $4.50 a trade.

DRIPs allow you to capture the power of compound interest. For example, say you own shares in Proctor & Gamble and they pay you a $5 dividend. If shares cost $50 a piece you won't be able to invest that $5 until you get enough to buy a complete share. A DRIP will buy a partial share and continue to reinvest your money until you're ready to live off the dividends.

Thousands of books have been written about these topics. My hope is I've changed your way of thinking and started you on a path to financial freedom. Subscribe for free updates and I'll share more information on passive income and the other topics in my 6 step plan.

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Use Credit Wisely - Credit cards will pay you

It's time to make your credit cards pay you using this step of my 6 step plan. When you make a purchase with a credit card the store gets charged a fee by the credit card company. Many credit card companies pay you a portion of this money in the form of rewards. They're hoping you'll carry a balance and only pay the minimums so they make money from you as well but you're too smart for that! The lesson about eliminating bad debt taught you it's painful to carry credit card debt. From now on treat you credit cards like cash. Make the following promise to yourself:

Credit cards are the same as cash. I will never spend over my budget. I will always pay them off in full every month.

With that promise in mind you should maximize your use of credit cards for routine spending to get money back in the form of rewards. If you're spending money on necessities within your budget you might as well get some of that money back. You won't be charged any interest as long as you pay off the full amount with every statement.

The key is keep yourself disciplined. Don't break your promise! You'll need a system to track how much you're spending. Personally, I use Quicken because it automates the process for me but you can use any tracking system that works for you.

If you want to build your credit score you need 4-6 credit cards with high limits that you pay off monthly. Keep your oldest credit card to boost your credit score but consider cancelling your other cards and using the ones I recommend to get the most money back. Type the name of the credit card in the search box at to get the application.
  • 5% cash back on gas and 2% on groceries using PenFed Cash Rewards. The best thing about this card is they automatically pay you the rewards in your account monthly. You don't need a $50 minimum like most credit cards to get your reward. Cash back always trumps airline points in my book. Airline points come with blackout dates and often expire after a year.
  • 5% back on restaurants and using Citi Forward. You can actually triple the bonus by using your points to purchase restaurant gift certificates from They offer $25 gift certificates for $10.
  • 1.25% cash back on everything else using Bank of America Accelerated Cash Rewards. You'll only get 1% cash back on other rewards cards, it may seem like a small difference but it adds up with a year of spending.
  • When traveling overseas avoid foreign transaction fees using Capital One No Hassle Cash Rewards . Credit card companies charge you up to 3% of the purchase price when you use your credit card overseas. No such fees with Capitol One and they'll automatically apply your cash back rewards to your account!
I save hundreds of dollars every year using my credit cards wisely. If you remain disciplined with your budget the same approach can work for you too. Don't pass up free money!

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Save for Retirement - Invest with a balanced ETF portfolio

It's time to start building your nest egg for retirement. The earlier you start this step of my 6 step plan, the faster your money will grow. It's essential you start after eliminating credit card debt and stick to your budget. If disaster strikes, fall back on your emergency fund and don't touch your retirement investments. You can easily ruin your returns and get hit with fees by withdrawing your retirement account early.

Even if you plan on serving 20 years and using your military pension you need to start your own retirement account. Why? People change, plans change and you'll need money to maintain your lifestyle. Social security will be long gone when you retire. Set a goal of investing 20% of your salary towards retirement. Incorporate it into your budget and have a monthly automatic deduction into a money market account.

The amount of information about retirement choices can be overwhelming. I'll simplify it for you with a safe, diversified method of investment. People often get confused about accounts, investment vehicles and taxes so I'll make a simple analogy. Your retirement account is a designated field with investments you plant. You can choose to either pay taxes on the weight of the seeds (Roth IRA) or the full grown crops (Traditional IRA) at the end. Think about the compounding interest chart, it makes sense to pay taxes on the principal (blue) so you don't have to pay taxes on the larger interest (red and green).

You should fund your retirement accounts in this order:
  1. Employer matched contributions (it's free money, sadly not an option for active duty military)
  2. Roth IRA - $5,000 yearly contribution limit
  3. Thrift Savings Plan (TSP) - $16,500 yearly contribution limit (or your company 401k plan)
There's tons of information on where to put your money. The safest bet is to invest in as many companies as possible while minimizing your costs. You accomplish this by buying Electronically Traded Funds (ETFs). The ones I recommend track index funds which are funds made up of hundreds of stocks and have low maintenance fees. Historically stocks perform better than bonds and smaller undervalued companies have performed better than large ones. The following plan assumes you have at least 10 years until retirement and diversifies your portfolio not only across US companies, but across the entire world.
  • Open a Roth IRA account at Firstrade. Send me an and I'll refer you, earning you five free trades. Firstrade has no IRA fees and gives you a free dividend reinvestment plan (DRIP), which compounds your earnings.
  • Save $5,000 a year either by setting up an automatic deposit to Firstrade or an automatic monthly deduction into a money market account.
  • On November 1st of every year buy these ETFs for a balanced portfolio:
    • 45% US Total Stock Market (VTI)
    • 20% Foreign Markets (VEU)
    • 15% US Small & Mid Caps (VXF)
    • 10% US Small-Cap Value (VBR)
    • 10% Emerging Markets (VWO)
You can get close to the same balanced portfolio with TSP using a breakdown of 35% C fund, 35% S fund, and 30% I fund. For you flyers out there consider putting all of your flight pay into TSP every month. It follows the principle of "pay yourself first." If that money isn't sitting in your checking account you'll never miss it.

You'll need to rebalance your portfolio when you get within 10 years of retirement to reduce volatility. Try using life-cycle funds from USAA, they'll automatically adjust your risk as you get close to retirement. You can beat the returns of ETFs using individual stocks but it's riskier and requires you to do research. If investing doesn't interest you, stick to this simplified plan.

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Build an Emergency Fund - Create your own financial safety net

Congratulations! If you've made it this far you're sticking to your budget, out of bad debt and miles ahead of the average American. The hard part is over. Maintain your budget and the good habits you learned along the way. The next step of my 6 step plan will turn you into your own personal bank.

Think about it... how do people get into debt troubles to begin with? Life happens. Roofs collapse, cars crash, people are fired. You can't plan for these things. The only thing you can be sure of is they will happen at the worst possible time. When people are hit with these financial Chuck Norris roundhouse kicks to the face they turn to credit card debt. As you learned in the last step, you pay back triple the amount of money you borrow from a credit card company.

How can you plan for the unexpected? Your next goal is to build an emergency fund. Put 3-6 months of expenses into an account and only use it in case of emergency. Adjust the size based on your personal risk. Use the low end (three months) if you're single with a steady job. Use the high end (six months) if you're the breadwinner for a large family in uncertain times. This isn't your vacation fund or your new car fund. Only use this money when a life emergency happens. Here's the major benefits:

  • You'll never get into credit card debt again.
  • You'll never be tempted to tap into your retirement accounts.
  • You borrow money from yourself, interest free!
  • You have peace of mind knowing you have a financial cushion in case of hard times.
When hard times hit you can rely on this fund until you find a new job or repair damages. When your situation is resolved it's important to treat it like a loan to yourself. Set a repayment plan and automatically deduct money from your monthly paycheck until your emergency fund is paid back.

The last import point is where to park your emergency fund. You never want money sitting in a checking account unless you plan on spending it within the next month. Since you hope to never spend your emergency fund it needs to earn interest. Remember the lesson on inflation in the last step? Money is worth 3% less every year. Think about it, gas cost less than 20 cents in 1950, now it's over $3.00. The same principles apply to your money. If it's not making 3% a year, you're actually losing money.

Most military members bank with USAA (including me). I parked my emergency fund in their "Income Fund" (USAIX). Most of their mutual funds require a $3,000 minimum deposit to open but there's a loophole. You can also open them by setting up a $50 monthly deposit which you can cancel or modify at any time. Stop the transfers once your emergency fund has enough money in it. You can transfer money in and out of this account just like your checking accounts. If you choose to use a different fund make sure it earns at least 3% a year and is low risk. Take a look at the fund history during rough years like 2008 to see how it performs during a bear market.

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Eliminate Bad Debt - Stop paying triple with credit cards

Now that you're sticking to your budget, it's time to concentrate on digging yourself out of debt. The next step of my 6 step plan focuses on credit card debt. The average American household has nearly $16,000 in credit card debt. Not a big deal, right? Assuming you pay the minimum payments at 20% annual percentage rate (APR) it would take you 14 years to pay off your credit cards. Even worse, you'll have paid $30,000 in interest on top of your original amount. Remember those $100 shoes you put on your credit card? By the time you pay them off they cost you $300.

You'll never dig yourself out paying just the minimum monthly payments. Follow this aggressive payment plan:
  • Rank all your credit cards from highest APR to lowest. Put all of your extra money towards paying off the highest APR card and the minimum payment on the others. Keep going down the list until they're all paid off.
  • Transfer your balances with a 0% APR offer. You can pay down your debt for 18 months interest free! What's the catch? Credit card companies are betting you'll keep spending instead of saving but stick to your budget and you'll win. If you can't pay down your debt at the end of the 18 months transfer again to another 0% APR card. Use these offers for the highest APR credit cards first.
  • Lock away your credit cards but don't cancel them. You're switching to a cash-only spending plan. Remember that budget you made? Take out your spending budget in cash every month instead of going back to credit cards. Studies show you're less likely to spend cold, hard cash especially in large denominations. $100 bills will tighten up your spending habits quickly.
  • Throw everything you have at the highest APR card. This includes savings accounts, home equity loans, loaned money from family. Try a low rate personal loan from Lending Club. Unless you have a magical savings account that's earning you 15-20% interest (no one does) you're losing money by not paying off your debt.
The same principles apply to any high interest loan (personal loans, car loans, etc over 10% APR). There's a difference between good debt and bad debt. Everyone is expected to have a mortgage, student loans, and sometimes even personal loans (they actually help your credit score). Don't feel the need to pay these down quickly if they have a low rate. Money devalues about 3% every year because of inflation. So if your student loan has a 2% APR, the bank is actually losing 1% on you.

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Follow a Budget - Simple ideas to control your spending

The first step of my 6 step plan is easy. There's a simple rule you need to follow no matter how much money you make:
Live within your means. Spend less money than you make.

How much you get paid every year is not a measure of your wealth. The number you need to concentrate on is the difference between what you make and what you spend. I call it your wealth potentialMaximize your wealth potential and you're well on your way to financial freedom. Sounds simple enough but most people don't follow it. With every promotion and pay raise comes more expensive toys, flashy new cars, more huge tabs at the bar. These things may make you feel rich but in reality they're keeping you in the poor house.

"We are not rich by what we possess but by what we can do without." 
— Immanuel Kant

Think about your personal finances like a business. The success of a business is measured in how much profit they make. Profit is what's left over after all the expenses are paid. Would you want to own a convenience store where your monthly rent was consistently higher than your sales for the month? You'd be out of business quickly. You might think someone earning $200,000 a year is rich but if they spend all of it on expensive cars, meals, vacations, and rent they have no wealth potential. They'll be broke the minute their high-paying job dries up. We've all heard stories of celebrities who have blown through their money and hit rock bottom after making millions. Check out what MC Hammer is doing to earn a buck right now.

How do you break this vicious cycle? You need to create a budget and follow it. You don't need a complicated system listing every possible category you spend money on. Make a simple plan and follow it. Grab a sheet of paper or a spreadsheet and list out your monthly expenses. If you need some automation try out a program like Quicken.

Your budget categories must be a percentage of your income. Strive to spend no more than 50% of your income on all your expenses (rent, food, car payments, utilities, entertainment). It's not feasible for all of us to live on Airman Basic pay but who says you have to blow through all of your promotion and bonus money? By making your budget a percentage of your income, your living costs can only increase as a fraction of your income.

What can you eliminate? We all need a place to live and food to eat but you can take simple measures like going out to eat only one day a week (cooking for yourself is healthier), taking a lunch to work, finding more sensible places to shop, or maybe only going out to eat for dinners on your next TDY. One of the biggest money pits is buying a new car. Did you know it drops 20% in value when you drive it off the lot? If you think your is car an investment let me set you straight right now. Investments are assets that pay you money later. Cars, electronics, clothing, and rent are all expenses. Even your mortgage payment is considered an expense. There's no guarantee your house will appreciate in value, your mortgage payment needs to fit within your budget.

Here's a simple example of why you should trim the fat from your budget... instead of buying that $5 Starbuck's Latte every morning before work brew your own coffee and take it with you. Seems like a small sacrifice right? If you invested that $5 every week day, in 20 years it will be worth over $72,000! Ask yourself "Is that expensive coffee worth delaying my retirement for a full year?" I'm not asking you to stop ever spending money on yourself but list out what gives you the most pleasure and trim down the rest. For me, it's travel. I'll never regret money I spend on a vacation so I'll gladly make some small sacrifices in other areas to save up for my next trip.

Create your budget and stick to it. Plan for upcoming expenses. If you have a big upcoming expense, start saving now. USAA allows you to open as many saving and investment accounts as you want. For example, if I were going on a vacation in 12 months and knew I wanted to spend $3,000 I would start a vacation fund and set up an automatic transfer to pay myself $250 out of every paycheck, it's harder to spend money when it's not burning a hole in your checking account. Out of sight and out of mind. The goal is to not take on long term credit card debt to cover big ticket items. Plan as much as possible.

We'll get into investing later but for now you need to break your bad habits, trim the fat from your spending and put all your energy towards completing the next step.

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Why You Should Invest - Start early, retire early

As an active duty Air Force pilot I know life can be hectic... always on the road, deployment after deployment, endless training at home. It seems like there's never enough time to get anything done. I'm always surprised how many people I fly with haven't given much thought to retirement. There are lots of reasons: "it's too complicated" or "I don't have the time for that stuff."

Getting financially healthy is one thing you can't afford to put off. The truth of it is, the later you start the harder it is to catch up. Ever hear of compounding interest? It's how investments grow. Take a look at this graph.

You don't need a degree in math to see your money grows at an exponential rate if you invest early enough.

Say you plan to retire after 20 years in the military and start investing a modest $5,000 a year for retirement. You can expect a nice nest egg of $280,000 in addition to your military retirement at the end. Your buddy Airman Snuffy decides he wants to party it up and put off investing for six years. After waiting six years to start saving he can only expect $140,000 at the end, HALF of your retirement. See my point? The time to get financially healthy and start investing is NOW.

I graduated with my MBA in 2009 and love financial planning. I've designed a simple 6 step plan tailored to the crew dog (slang for military aviators) but the principles apply to everyone. Think of it as your retirement gouge. My motivation? I want to see all my military brothers and sisters succeed! We all make huge sacrifices for our country, at the very least we deserve a secure retirement at the end.

Do yourself and your family a favor and put the time in now... you'll thank yourself 20 years down the road. Click on the 6 step plan at the top to begin.