Spending money is fun! Who doesn’t like hitting the town with their hard-earned cash and buying some new clothes, eating out at a favorite restaurant or getting that new iPad? The reality is that most people prefer this revolving door consumerism over saving money, which forces them to barely scrape by on a check to check basis.

There is a definite psychological connection to saving and spending habits. Aside from the psychological implications behind the process of impulse purchases, spending money grants us instant gratification, as we get to enjoy our new purchases immediately and improve our ‘societal status’! Consider that the average consumer salivates over unnecessary expenditures much like one of the dogs from Pavlov’s experiment, where a bell was struck prior to presenting them with food; causing saliva to pour from their salivary glands. Homosapiens are smarter than canines…aren’t we!?

Saving money, however, does not bring any immediate satisfaction, except for that rare breed of person that loves to see growing numbers on paper. The gratification we get for saving money comes later. It’s delayed gratification, and in our current society, delayed gratification is not vogue. However, the truth is that a $1,000 personal emergency savings account is essential for people who wish to become financially independent. This will give us the buffer that we need.

Why We Need It

Many of us live and conform to a debt trap that keeps us in a state of financial solitary confinement. Risk involved investments similar to stocks or fx trading are great for building a passive income, but are not the answer to true financial independence. With very little or no personal savings, most people finance unexpected expenses with a credit card, which simply puts true financial freedom further out of reach.

This is the inherent power of the $1,000 emergency savings account. Instead of using a credit card for unexpected expenses, a person can now finance their own needs with their savings account. This may seem like a small thing, but it is a big step toward financial freedom. It is breaking free from dependence on someone else, or the credit cards that serve to set us back.

Unexpected Expenses

An unexpected expense is not that amazing pair of shoes you see at the mall on Saturday morning. An unexpected expense is an emergency expense which you did not plan for such as car repairs, unemployment, medical emergencies, and home maintenance emergencies. The unknowns in our lives are often what get us into trouble.

A simple oil change on your car can turn into your repair shop not tightening that fuel filter enough. Your oil slowly leaks out, while you are none the wiser. The unfamiliar smell of an engine burning off the remaining oil is lost on us, as our untrained noses are not tuned into such a diagnosis. The result: a blown engine, a financial blunder that will set us back for months, and we will be forced to borrow money or be struck by any number of life’s ever lingering negatives all at once.

Diffuse that bomb before it blows up in your face, by giving yourself a nice safety blanket for such unforeseeable expenses. When you have to dip into the emergency account for any of these types of expenses, then you simply replenish the account as soon as possible.

How To Build The Account

The most practical way to build a $1,000 emergency savings account is to first of all track your expenses for one month. Keep every receipt and write down every expense, whether it’s a pack of gum or a new shirt. At the end of the month, sit down at your desk or table and add up all of your discretionary spending. Most people will be shocked at how much they spend at Starbucks and other similar outlets each month.

The next step is to set up a monthly budget that includes income and all necessary, essential expenses. Remember, that bottle of Johnny Walker Blue Label is not necessary. Look at your income that is left over after all necessary expenses are accounted for. Of that amount, commit to saving a certain percentage of it each month. It might seem like a small amount, which is fine, but start with something. Even if it is only $20 or $30, a small start can lead to good places.

Continue this discipline until $1,000 has been saved. At that point, your emergency account is funded! Remember, that this money should not be spent on anything except absolute unexpected essentials. Do not use this savings account to roll into a stock or other investment types. Don’t chip away at the account either! Small luxuries will never match the bliss of financial freedom.

Building an emergency savings account is a major step toward breaking the debt cycle and being financially independent. Once you have set yourself up with this initial emergency savings account and see the benefit behind it, read up on an advanced spin off called an emergency fund. The road to financial freedom is only as long as you make it, so take the necessary steps to become financially responsible.

Related posts:

1. 5 Reasons to Open a High Yield Savings Account
2. How to Make an Emergency Kit for Less Than $100
3. I’m Out of Debt, Now What?

Related posts brought to you by Yet Another Related Posts Plugin.

What is passive income? There are many different definitions that are thrown around depending on where you look. Some critics argue that there is no such thing and that anything claiming to be must be a scam. On the other hand, there are a large group of people who misinterpret the terminology and claim anything earned online is passive. The real definition fits somwheres in between these two extremes.

Let’s check out a few well respected online sites to get a better understanding of what some of the experts are saying.

The Simple Dollar says that it is – “… any source of sustained income that you earn without any additional work.”

Wise Geek states that these earnings are “… a type of income that once setup, requires no further input from the recipient.”.

Moolanomy definition states “… This is the opposite of active income. Once you stop spending time on these income sources, the income flows don’t necessarily stop. Of course, there are varying degree of passitivity and it’s desirable to have highly passive alternative income sources.”

IRS Definition

The United States Department of the Treasury has it’s own classification that is probably different than what you have heard in the past. According to the tax classification –

Passive income can only be generated by a passive activity. Just because the taxpayer did not work for the income does not mean it is passive. There are only two sources for passive income:
1. a rental activity; or,
2. a business in which the taxpayer does not materially participate.

The federal government goes on to say that the following types of income cannot be considered passive -

• Interest Income
• Dividends
• Royalties
• Gains on Stocks and Bonds
• Annuities
• Lottery Winnings
• Salaries

Definition of “passive” & “income”

Take a look at the definitions of what the words “passive”, “income”, and “passive income” mean according to Dictionary.com –

passive – “not participating readily or actively”

income – “the monetary payment received for goods or services, or from other sources, as rents or investments”

passive income – “Earnings an individual derives from a rental property, limited partnership, or other enterprise in which he or she is not actively involved”

The Passive Family Income Definition

It is absolutely necessary to honor and abide by the IRS classification of passive income for tax reporting purposes. However, that does not mean that we cannot consider dividend or interest income as passive for example. Regardless of how the income is classified for tax reporting purposes – a passive form of income requires less of your time so that it can be used on something else.

Here are 3 traits that can help clarify the definition listed above -

• Upfront Investment – An initial upfront investment of time is required. There is no such thing as a get rich quick method for creating this form of cash flow stream. Instead, it takes an initial investment of your time to build a successful and sustainable passive income stream.
• Limited Participation – Once a passive income stream has been established there is still some limited participation required. While the level of participation may vary, it is virtually impossible to completely ignore this type of income stream. The key however is that this type of income does not require full time participation by you.
• Potential for Recurring Income – Creating passive income has the potential but does not guarantee continuous recurring income. Once the initial time investment is made, the income stream has the possibility to earn income over and over for years to come.

What is your definition of passive income? I would love to hear back from you and will consider adding your definition to this list (positive or negative).

Related posts:

1. 18 Passive Income Opportunities to use your Tax Refund on
2. How to Identify the Best Passive Income Streams
3. Top Passive Income Streams You Should Consider

Related posts brought to you by Yet Another Related Posts Plugin.

What does financial freedom mean to you? Does it mean that you have enough money each month to cover your bills? Maybe it means that you have so much money saved up that you are free to spend it on whatever you want. Other people may claim that financial freedom is to become completely free of debt.

Those are all okay answers, but the real definition of financial freedom is much more. It is more a way of life than a definition and varies from person to person. Becoming financially independent is having the freedom to live your life as you wish without any worry about money. No more being tied down in that 9 to 5 job or working those extra overtime hours just to make ends meet. Financial freedom allows you to do what you want, when you want.

Here are a few key elements that are critical to becoming financially independent.

Diversified Income Streams

Do you own stocks? If you invest in the stock market, then you have heard the term diversification. Financial experts love to stress the importance of spreading your money across multiple assets. Since you listen to your financial adviser about keeping your savings and assets diversified, why wouldn’t you diversify your income as well?

An important step of becoming financially independent is to build multiple income streams from several sources. If one source dries up for whatever reason, your risks are then minimized. Without proper diversification of income streams, financial freedom will never be possible.

Automation & Outsourcing

Automating your income streams is another important part of becoming financially independent. Nobody wants to work their whole lives, so building passive income streams is critical. One way to create these sources of income that require very little of your time is through automation and outsourcing.

If you can successfully leverage technology to automate your income streams and let outsourcing handle the remaining tasks, you have created a passive model. Provided there is enough money leftover after paying for automation and outsourcing (also known as positive cash flow), then you are well on your way to finding financial freedom.

Lower Your Expenses

It doesn’t take a financial expert to tell you that to be fiscally sound, you need to have fewer expenses than your income. Financial freedom relies on this basic economic concept. If you are able to keep your expenses lower than your income, you will have a surplus of money leftover instead of debt. One of the most important building blocks to financial independence is by living debt free.

Defining Financial Freedom

When it comes down to it, financial freedom is really very simple. Build a set of diversified income streams that can be automated which bring in more income than your expenses. At the end of the day, if your portfolio of automated income streams can support your lifestyle of choice, then you have become financially independent!

How do you define financial freedom?

Related posts:

1. Plan, Do, Check, Adjust Your Way to Financial Freedom
2. 10 Financial Descions I would Like to Have Back
3. Profit in tough financial times

Related posts brought to you by Yet Another Related Posts Plugin.

I recently documented how I plan to build an online store during my recap of 2010 SMART Goals. My plan is to create an online store that will generate at least $500 in income per month on a recurring basis by the end of this year. This future revenue stream is probably the most dynamic and exciting of my 6 income streams that I plan to build and grow this year. It is also the income stream that I know nothing about!

The Online Store

I will provide some more details about my online store later, but in order to get it up and running, I need to officially form my business. I don’t plan to sell my own product in this online store, as that would go against the passive income model that I am looking to build. Instead, I plan to sell wholesale items, which will require a business license. Most wholesale suppliers require a copy of a business license and/or Tax ID number to open up an account and begin purchasing products.

I have always had the intentions of officially setting up my business, but kept putting it off. Creating an online store is forcing me to take action and finally take the steps to make everything official.

As I am currently stepping through the process of setting up my business, I thought I would provide some helpful tips you may want to consider for yourself. Check out my list below for more details.

4 Things to Consider When Setting Up Your Business

I am not officially through setting up my business yet. I still have a few things to complete, but am well on my way to making everything official!

Here are a few things that I needed to decide on when forming my business that you may want to consider when the time comes for you to open up shop -

1. Type of Business – After reading up on different business structures like a Sole Proprietorship, Partnership, or Limited Liability Company (LLC), I have decided to go with an LLC. When it comes down to it, I want to protect my personal assets from my business, which is why I went with the LLC. Regardless your preference, you need to do some research and think about the type of business structure you would like to create before going through the process.
2. Company Name – I probably shouldn’t feel this way but I have never really given a lot of thought to a company name. To me, there is just more important things to think about when starting up a business. However, having a company name is required to officially form a business. I have come up with 3 possible names to call my business and will announce the winner when everything becomes official. If you are considering creating a business, then spend a little time coming up with a few options of how you plan to name the entity.
3. Business Location – As I plan to operate my LLC business in the U.S., I needed to make a decision on what state to operate in. This was actually a very big decision for me, based on the state that I reside in. Several months ago, Amazon terminated my Associates account with them based on a new tax law that was passed in my home state. Basically this means I can’t earn any affiliate income through Amazon. I strongly considered forming my business outside of my home state, so I could once again use Amazon to generate income. I ended up deciding to form my business in my home state after weighing all the options. This is something that you may want to research a little more, depending on where you want to form your business.
4. Company Address – Since I decided to form my company in the state that I reside, my next decision was picking a company address. I could have made things easy and cheap and used my personal address as my business address. However, I wanted to keep my business affairs separate from my personal life and decided to get a business address. For less than $30 per month, I am opening up a business address by creating a new mailbox account through UPS. This is another question that you should ask yourself before you start the process of forming your business.

Final Thoughts

There is something about officially forming a business that is exciting to me. I have always wanted to do this, but never took any action to get things started. Now that I have a set of defined goals in place, I am forcing myself to make the move. For a few hundred dollars, I will have setup an official business entity that I can call my own. I believe that it adds some legitimacy to what I am working towards and is just another part of working towards financial independence.

Have you officially setup your own business? What type of business structure did you use?

Related posts:

1. Starting a Home Business – Setting Up the LLC
2. 4 Ways to Make Money with the Things You’re Already Doing
3. How to Apply Newton’s First Law of Motion to Your Business

Related posts brought to you by Yet Another Related Posts Plugin.

]]> http://www.passivefamilyincome.com/setting-up-your-company/feed 7