The passive income crossover point and wealth preservation
The concept of a passive income crossover point is borrowed from this blog. After a certain point your passive income meets or surpasses your living expenses after taxes. Another very valuable concept I understand is that it is important that an investor take care to allocate their wealth in such a way that they do not have to worry about outliving their investments.
What is the function of assets?
When people are young, healthy, at the top of their game, active income is where it's at. Active income is maintained by continuously adding value to people, organizations, projects, etc. If we are speaking of Steem the active income is unlocked by adding value to the Steem platform either by generating content which viewers value, or by writing code which increases the utility value of the platform, or by curating content which provides a sorting functionality which increases the utility value of the platform by saving content consumers time.
Simple ways to add value are to find ways which save people time, save people money, or which add valuable information which is useful. If Emily knows something relevant for Doug which Doug does not know and shares that with Doug, then it is Emily who added something of value to Doug's activities. So even posts on Steemit about "here is the latest update" or "I just discovered" can have great value. The point being that active income is a result of adding value and even just being entertaining to people, making people laugh, adds value. Simplified down to it's most succinct express, to add value be useful to others.
Assets are that which you own which is useful, valuable, etc. An asset can be a useful resource, a useful person, but the keyword to understand what an asset is, it's "useful". Anything useful or valuable to others can become a "productive asset" which means it can generate income. For example precious metals are assets because people find them valuable and are likely to keep finding them valuable. Gems are also assets which people find valuable and will likely keep finding valuable. Productive assets different from regular assets in that these productive assets can be rented or are able to be leveraged in some way to generate income. Real estate, a farm, a profitable company, these add value to society while simultaneously paying out income to their owners.
Assets vs liabilities
Wealth can be measured by making a chart which on one side contains all assets owned by a particular individual. On the other side of the chart are all the liabilities owned by the particular individual. This is a basic cost benefit approach, but it can allow a person to find out how wealthy they are not in dollar terms but in "real wealth". On side A would be all that an individual owns which can be used to generate income or which can appreciate in value over time with development, while on side B is all the costs, the debts, the liabilities. Any individual can then use the basic formula of dividing total liabilities by total assets to receive the "debt ratio". This is useful information for an individual to know because by knowing and tracking their real wealth they can learn how to improve and grow their wealth.
Assets include that which individuals are born with and that which people can acquire. Anything an individual is born with still counts as it can be leveraged to generate income but this is active income. Additionally just being born gifted is not enough as it takes constant development and self improvement to generate active income indefinitely. Passive income is what individuals generate as well or in addition to active income in most cases until they retire. So for instance a person working whether blogging on Steemit or for a salary is actually generating active income by improving themselves and applying themselves. Their assets could include their knowledge, their inner drive, their relationships and or ability to work with others, there are many different ways but in general if an individual has to do something to get something in return then it's an active investment on their part.
If an individual adds value to themselves over time then it makes it easier for the individual to generate active income a lot of the time. Pursuing and gaining knowledge, building relationships and teams, staying healthy, all contribute to improving the individual and add value to self. This adding value to self is the process by which an individual can develop their capability of adding value to others. It is well known that eventually health fades do to aging, the memory may not be as sharp, the eye sight may become dull, the physical fitness begins to fade, but this is why it is critical for an individual to understand the importance of passive income. If there comes a time where an individual may have to be less active or where things fade due to aging then passive income may be the only remaining source.
Measurement is a key concept for obtaining and maintaining wealth. Evaluating stocks requires a deep understanding of financial ratios. Evaluating anything requires measuring. Financial ratios are a way to evaluate the financial health of something, whether it be an individual, a company, or anything. Examples of ratios include P/E ratio, and when these ratios are combined to form a model then an investor can screen opportunities with precision. Assets which have good ratios often appreciate over time, but admittedly this requires discipline. The easiest way is to contact a qualified financial advisor after doing your own research and screening your opportunities to compare what you can accomplish on your own to what advice you can receive from they who are qualified to give it.
The key concept behind all of these topics is wealth preservation. We are born with wealth and we can leverage that wealth while we are alive to generate more wealth. Many people try to generate as much wealth for themselves during their lifetimes as they can. Wealth has a natural tendency to dissipate over time unless steps are taken to preserve that wealth across time. Material possessions do not last, and knowledge which is useful in 2018 may not be useful in 2048. Wealth preservation is about finding ways to store and distribute wealth generated so that it can be passed down to future generations. This could be as simple as parents leaving a home to their children or as complex as Gates setting up a foundation to cure diseases.
- Figure out where your crossover point is. It is different for everybody. One formula to help determine if you've met it is to
- Figure out which activities can allow you to add value to yourself and figure out which activities are liabilities. Avoid activities which can negatively impact your wealth.
- The formula introduced by Doug Massey age*net worth/yearly expenses. If your score is over 1000 according to this formula then you're set for life. Of course this is just a formula but it provides a math based means of determining when you've got enough to live free.