Investment Income Made Easy - Live on Residual Income

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Every digital nomad has their own story about how they “broke free” from the rat race and what keeps them going. My story is about how I used investments to create a residual income and how that income pays me enough each month to allow us to travel forever.

“Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.”
― George S. Clason, The Richest Man in Babylon

I learned about this in a number of ways, but the short story that really stuck with me comes from the book “The Richest Man in Babylon”.

The lessons from this book still work today - and although I have a substantial background in Finance and Investments:

Bachelors and Masters Degrees focused on Finance and Financial Engineering
Years of experience as a Personal Financial Advisor, Investment Manager, and Corporate Financial Analyst

I honestly believe that you don’t need that experience to apply the simple knowledge learned in that book.

However, to help add a little more value, I’m going to share with you the most important lessons that I’ve learned since I got started back in 2008 to help you get to retirement much quicker than you might be thinking.

How Investments Work

Your money could be working for you and earning you 6-12% per year of additional money. How much money is that exactly? Well, it depends on how much you have to invest, of course.

So, for the sake of making things easy to understand, essentially every $10,000 that you invest into the market will earn you an additional income of $600 to $1,200 every single year (on average). [Learn how we travel the world on only $1,000 per month!]

At some point the “extra income” might even be enough to completely replace your regular income!

But, wouldn’t it take an extremely long time to accumulate that much money?

Typically, yes. However, there is a new method called “FIRE” that can get you to retirement in as little as 10 years! I know that might sound magical, but it really can work that quickly if you simply follow the directions.

After learning how to automate this “FIRE” process, I’ll recommend a few other methods that you can apply to your investments that can get you there a even faster.

That’s right, methods that I’ve learned over the years - as an Investment Manager and Financial Advisor - that you can combine with the lessons in FIRE and get you from having $0.00 in your bank account today to complete Financial Independence and Retirement in as little as 5 years!

The FIRE Community

The FIRE community (Financial Independence, Retire Early) is perhaps the biggest generational “wake-up” to financial literacy that there ever was.

“The FIRE (Financial Independence, Retire Early) movement is a lifestyle movement with the goal of gaining financial independence and retiring early. The model became particularly popular among millennials in the 2010s, gaining traction through online communities via information shared in blogs, podcasts, and online discussion forums.
Those seeking to attain FIRE intentionally maximize their savings rate by finding ways to increase income and or decrease expenses. The objective is to accumulate assets until the resulting passive income provides enough money for living expenses throughout one's retirement years.” - Wikipedia

People have been jumping on board with this movement over the last couple of years and actually retiring super early with sizeable amounts of residual income from their investments. That includes me, and that is why I’m sharing this method with you.

They might not know a ton about investments individually, but as a group they have been sharing some of the best advice on where to park your money, with the lowest fees, to earn the highest returns.

Key Lesson from FIRE: Lower Investment Fees

One big draw to FIRE is the fact that fees tend to eat up investment returns, so FIRE advises you to find the lowest possible fees that you can.

For example, if you’re earning an 8% return on your money each year but the fees are 2%, then you only end up keeping 6% each year.
That is actually 25% of your income in year 1 alone, but it can compound to be a massive amount over a 10-20 year period.
Your investments could have had more than DOUBLE the money at the end of year 40 if you simply had a 0.1% fee instead of a 2.0% fee.
That 2% fee cuts away 40% of your profits over a 20 year period, and over 52% of your profits over 40 years - simply due to the decrease in compound growth year-over-year.

Too many investment advisors are getting paid this fee just to allocate money into different mutual funds for you. Learning how to do that on your own is VERY simple - a single FIRE based book can teach you how to do it - so it’s not worth paying half of your retirement for that knowledge!

“There are far, far more people on Wall Street who made their money through their selling ability than through their investing ability.” - Warren Buffett

So, like the quote above by Warren Buffett says, nearly all of these advisors are getting rich simply by bringing on new clients and charging them fees - and not in any way by their skill of selecting “winners,” or good investment opportunities. That is a completely different topic, which I will discuss with you later when we attempt to speed up your retirement date. As for nearly all the advisors out there, they are just there to allocate you into these funds and get paid the fee.

I, and a few other financial advisors that I know, found that charging these annual percentage fees was NOT in the best interest of the client and, therefore, feel that it is unethical. Knowing that, we’ve all changed careers. I started managing investments instead, where the efforts that I made actually added value instead of taking it away.

The book A Random Walk Down Wall Street, concludes that owning a broad based index fund of most stocks will do better than having an active portfolio manager over the long term. This isn’t wrong, as most financial advisors simply don’t do anything more for you than place you into these funds and then keep getting paid, on your money, every single year thereafter!

This fact has been proven, by and far, in nearly every situation that an independent investor could participate in - to the point that it would be like winning the lottery with an active manager to beat it. It's just not worth trying, and it costs way too much money in the long run with the fees.

And the main reason the index funds do better than having an active financial advisor? Most index funds have extremely low fees. It really is that simple.

Key Lesson From FIRE: Save More

Another key takeaway from the FIRE community is that, to really maximize your potential here, you should be saving “far more than the standard 10–15% typically recommended by financial planners.”

By using the FIRE method, some people have learned how to save up to 75% of their income per year. It teaches you how to be more frugal and how to get more with less. In other words, you may not need to give up anything in order to save more.

Combined with their methods of investing into high-return index funds with extremely low fees, they are able to create an investment that is large enough to completely replace their incomes.

“At a 75% savings rate, it would take less than 10 years of work to accumulate 25 times the average annual living expenses.”

Critics of FIRE and Their Arguments

There are a few critics of the FIRE movement, so I’d like to dispel those really quick.

Firstly, it is possible to save money even if you aren’t earning money.
Secondly, under the FIRE “4% safe withdrawal” rule, you can live FOREVER on your retirement income, not just 25-30 years.
Thirdly, the Fed generally protects portfolios in major downturns.

Part 1: Starting at $0.00 - Saving money when you aren’t earning any money

So, you don’t have a job. Or, maybe you do have a job but all of the money that you earn from that job goes to paying for things you absolutely need to survive.

Food
Rent
Transportation
And basically nothing else.

So, you have no spare money left “to save.” I understand. I’ve been there too.

When I got out of the military in 2005, I started college and was “paid” via my GI Bill to cover my expenses while I was taking courses. I had no money at the time other than that income. But, the income stopped suddenly during the summer because there were no courses happening!

I didn’t account for this, and ended up rationing hot dogs and ramen noodles to survive. No, seriously… I was counting on my ketchup to keep me from starving. I was late on my rent, and they were turning off my electricity. It sucked!

“Other books, blogs, and podcasts continue to refine and promote the FIRE concept, including Financial Freedom author Grant Sabatier, who works closely with Vicki Robin and popularized the idea of side hustling as a path to accelerate financial independence.”

The trick here is exactly that, “a trick.” A trick is what some people call “hustling” or having a “side hustle” to earn extra money. Back then I didn’t understand what that was because it really wasn’t defined that way at the time. Picking up a part-time job was the “trick” back then. But since then, there’s been a whole slew of new ways to make money on the side that don’t involve having a job of any sort.

Things you can do while you are sitting at home, or - in my case - sitting outside at a café in a foreign country, that will keep earning you money - on the side - from anywhere in the world. Eventually, they'll be earning you enough side money on a monthly basis to completely replace your regular income source and you'll find yourself thinking about how free you really are now, compared to before.

We teach about these “side hustles” in our Nomad Guide, but for now it is suffice to say that you can earn money by

picking up a remote job
having a blog,
a YouTube channel,
renting out your car when you’re not using it,
renting out your spare room on Airbnb,
becoming an Uber driver,
creating courses that you can sell online with skills you already know and are good at,
becoming an online freelancer or consultant through Upwork,
being a tour guide in your own town or city through Airbnb experiences,
becoming a yoga instructor,
a scuba dive instructor,
or even an on-the-side photographer.

The point is, we are living in an age where the “side hustle” is so easy to attain that you don’t need anyone else’s permission. And you don’t have to have any experience in any of them. So you can start earning a “side income” that you can then use to save the money you need for growing your investments. Starting at $0.00.

Just commit to it, and then tell yourself “this extra money isn’t for me, or for anyone else. It’s feeding my investment account and nothing else.”

That's pretty much how I got started as well. Although I did find a part-time job in my college years, I have rented out my spare room on Airbnb, I have rented out my car on Turo, I became a consultant, and I was even a tour guide for awhile.

Now, most of the money that I earn is the residual income that I receive from the investments that I made. This is because I used the money that I earned through these methods to invest - so my money would then work for me - and now I earn additional income through blogging as well. It can be done!

Part 2: You can live FOREVER on your Retirement, not just 25-30 years!

ARGUMENT: Based on their “4% safe withdrawal” rule, pulling out 4% of your total investment would deplete your portfolio in 25 years!

One of the rules in “FIRE” is the “4% safe withdrawal” rule - which means that you could safely withdraw 4% of your investment savings per year in retirement. If you started out with your full investment savings and took away 4% every single year, you would end up with 0% of your investment account in 25 years. That is simple math. And that is the argument that it won’t last forever. It’s a simple minded argument that is also wrong.

Why? Because that assumes that you pull it all out and thus it doesn’t account for investment gains during retirement.

Sure, you could pull out all of the money and then use a little bit each year until it’s gone, but the smarter way is to simply leave it in and live off of the money that your money is making for you.

Because investments ALSO EARN 6-12% per year, on average. So, if you start with $100,000 and your investment earns just 6%, your balance would increase to $106,000. If you then took out 4% of the initial $100,000 - your total wouldn’t drop to $96,000. It would have INCREASED to $102,000 because you took out $4,000 but you earned $6,000 in interest and dividends.

In other words, if you keep taking out 4% while you are gaining MORE than 4%, you could live FOREVER on just the interest on dividends without ever taking out ANY of the initial investment!

Once you’ve accumulated enough money to retire, you could use that money to live on.

Thus, if you were able to save 75% of your income for 10 years, you wouldn’t need to withdraw ANY of your money. You could just live off of the interest and dividends that you receive every year!

Part 3: The Fed generally protects portfolios in major market downturns

The good news for the lay-investor is that the Fed typically has your back, especially if you are an American, but also in the EU, UK, Japan, and a few other major developed countries. Actually, you don’t need to be FROM one of these countries either - as long as you create an account in one of those countries you’ll also be protected.

What does this mean? Essentially what it means is that even though there is no “FDIC” of the investment world to protect you from investment losses on a day to day basis – which you don’t need because it’s been proven throughout time that holding investments over the long term will average out any losses to the positive side – the Fed and other Federal Reserve Banks will typically step in during the case where you could take major losses - like during economic recessions and depressions.

In other words, if there is a major shock in the market that would cause you to lose a massive amount of money, they’ll fix the problem from their end and your investments will likely recover much quicker than you expected.

This was true in the Great Recession of 2007-2009, and it is true during the Coronavirus Depression of 2020. The Fed’s policies stopped the freefall in the stock market and completely reversed it. Even if stocks decline again during this period, I am confident that the Fed will “find a way” to correct the issue from the monetary side yet again, and that is the side that protects your investment portfolio.

Commitment to the FIRE Method

Now that you are confident in the fact that the FIRE method will work, and that you can start earning money on the side to invest into this method, it’s time to get started. The FIRE Movement started on the book “Your Money or Your Life” and then was improved by a few others over the years.

So, once you have a few dollars, we recommend buying these FIRE books to get started:

If you can’t afford any of those books just yet, start doing some serious research about the FIRE community on the internet. You can start by joining other FIRE based groups on Facebook such as these ones:

Once you’ve joined these groups, searched more about FIRE on the internet, and read these books, you’ll be ready for the real first steps: opening your investment account, starting up your side hustle(s), and choosing your first investments.

The Quicker Method

After you have that all started up, you’ll be ready to learn more about how to supercharge your investment portfolio to reach retirement, or financial independence, in as little as 5 years instead of 10. Just keep in mind that this part isn’t necessary, and if you prefer to keep it easy than you can just skip it entirely. The FIRE method is definitely good enough for most people!

However, if you’re interested in learning even more and supercharging your investments in a safer way, then check out the other article that I wrote. In that article, I share the methods that I’ve learned from reverse engineering some lesser known investments - such as Preferred Stocks, Stock Options, and Indexed Annuities - and how I’ve learned to tweak some alternative investment strategies - that I’ve learned while working in Private Equity and Hedge Funds - like closed end fund trading, pairs trading, and futures arbitrage - to supercharge your returns with a much lower risk.

These strategies do require additional education, and some others require an even larger commitment. However, you’ll have to ask yourself if it’s worth the extra years that you’ll save by retiring extra early.

Check out that article here: “Investment Strategies that Can Boost Your Returns”.

Investment Strategies that Can Boost Your Returns

The Oil-Gasoline Crack Spread

One More Alternative Method

Additionally, we can also show you how to decrease the amount of money that you need in order to retire comfortably.

If you really want to, or even you have to, you can commit to retiring in a foreign country instead - some of which only require 25 percent of what you think you need to retire (yes, where everything is basically 75% cheaper every single day)! There are MANY countries in the world where the cost of living is cheaper, but the quality of life is actually higher!

We take advantage of this method frequently while traveling around the world.

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FAQ’s

How does investment income affect taxes?

Investment income is money received from interest, dividends, capital gains, and other sources of profit from investments. It is taxed at a different rate than earned income and may be subject to preferential treatment depending on the type of investment and the length of time held¹. In New Zealand, you pay either Resident Withholding Tax (RWT) or tax at the Prescribed Investor Rate (PIR) on income from savings and investments in New Zealand². You need to choose the correct tax rate or you could face an unexpected bill at the end of the tax year. You also have to pay tax on any foreign investments you have, even if you’re a newly arrived resident². The tax rules for foreign investments are complicated and vary depending on what kind of investments you have and which country your investments are held in. Most people with foreign investments seek professional advice from a tax agent or financial adviser to ensure they pay the right tax.

What are some examples of passive income streams?

Passive income streams are sources of income that require little or no ongoing work or maintenance. Some examples of passive income streams are:

- Rental income from properties or platforms like Airbnb

- Royalties from books, music, or other creative works

- Dividends from stocks or funds that pay regular distributions

- Interest from savings accounts, bonds, or peer-to-peer lending

- Online courses, ebooks, or digital products that can be sold repeatedly

- Affiliate marketing, advertising, or sponsored posts on blogs or websites

How can I start investing with little money?

Investing with little money is possible and can help you grow your wealth over time. Some tips to start investing with little money are:

- Set a budget and save a portion of your income every month

- Open a high-interest savings account or a term deposit to earn interest on your savings

- Use a micro-investing app or platform that allows you to invest small amounts regularly

- Invest in index funds or exchange-traded funds (ETFs) that track the performance of a market or sector

- Diversify your portfolio across different asset classes, industries, and regions

- Reinvest your dividends and interest to compound your returns

- Avoid paying high fees or commissions that can eat into your profits

- Be patient and consistent and don't let emotions influence your decisions

(1) Investment Income: Definition, Example, and Tax Treatment - Investopedia. https://www.investopedia.com/terms/i/investmentincome.asp.

(2) Tax on investments and savings | New Zealand Government - Govt.nz. https://www.govt.nz/browse/tax-benefits-and-finance/tax/tax-on-investments-savings/.

(3) Tax on Investments and Savings in a Nutshell - MoneyHub NZ. https://www.moneyhub.co.nz/tax-on-investments-and-savings.html.

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