photo credit: lumaxartOne of the most important steps in building passive income streams is to use the money that you have earned to your advantage. I like to call it recycling my cash flow so that I can use it over and over again to build new sources of passive income. The concept is nothing new to investors. Many financial experts tell you to invest in your retirement plan early so that you can use compounding interest to build your portfolio over the long-term. The ideals for compounding your passive income are very similar to investing in a retirement plan that continually tries to reinvest it’s earnings. The only difference is that you are reinvesting your hard earned cash flow from passive income streams back into existing streams or into new streams. This is a very critical and necessary step in the creation of wealth. Obviously everyone wants to go out and buy a new flat screen television or toy with the income they generated. However, it takes discipline and long-term goals to avoid spending this money and to reinvest it into something that will work to generate more income for you.
I feel so strongly about recycling my cash flow that I choose to create my online identity around that concept. Take a look at my logo. Notice the two arrows that form a circular pattern? Those arrows represent the flow of income that is continuously reinvested back into more investments. While this is a simple representation of the flow of cash, it is the underlying meaning of why this site was created. Those two simple arrows are a constant reminder to me that I need to keep reinvesting my cash into existing and new investments that will generate more and more cash.
Here are a couple very simple examples of how one can recycle (reinvest) their passive streams of income.
- DRIP – Do you have dividend producing stocks in your passive income portfolio? DRIP stands for Dividend Reinvestment Plan and is a way to automatically reinvest your dividend earnings by using them to purchase new shares of the same stock. It is typically very easy to set up a DRIP plan through your broker. Reinvesting your dividend income through DRIP is a classic way to recycle your cash flow.
- Certificate of Deposits – If you own a CD, what do you do with the interest and initial investment once the CD has expired? My wife and I have most of our long-term CD investments setup to reinvest all of the original investment and the interest earned back into a new CD upon expiration. Each time one of our CDs expires, we have a 20-day window available to check out other CD rates and have the opportunity to switch to a different CD. This is one of the truest forms of passive income available.
- Blog Income – Do you generate any money from your blog or website? What do you do with the money? While my blogging income is still in its infancy stage, anytime I get a payout it is sent directly to my ING Saving’s account. The money will sit there and earn a little interest until I decide where to reinvest or recycle that income.
- eHow Revenue – I have a plan to eventually earn $1,000 per month in passive income from my eHow articles. Some may say that this is an unattainable goal, but I believe it can happen with hard work and dedication. What will I be doing with that $1,000 each month if I meet my goals? My plan would be to use that income to start a new passive income stream – a rental property. While that money won’t purchase a rental property outright, it should come close to paying for the monthly mortgage, taxes, and other expenses to support this opportunity. I don’t want to overextend myself with expenses from any new investments, so I plan to generate enough income to support new passive income streams.
- Rental Property – Someday when I purchase my first rental property and use monthly income generated from other sources to pay the bills – I should still receive monthly payments from a renter. While some of this money would go for expenses and upkeep, the other portion will build up and be reinvested into a second and third rental property. Get the picture?
How do you recycle your passive income?
- Cash Flow Management – Investing Passive Income
- Build Cash Flow by Adding a Roommate
- 3 Types of Passive Income that Require an Initial Investment
- No Cash – No Service
- 10 Ideas for Diversifying Your Passive Income Streams
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