A Brilliant Idea, Alternate Sources of Income. Inspiration to Start!

One thing that I have found most common among wealthy individuals is the ability to have and maintain alternate sources of income. Most people concentrate on their primary source of income and that is it. For one reason or another, many people tend to not develop alternate sources of income. Perhaps it is due to time, laziness, lack of desire, or just knowledge. Fact is, if you can find alternate sources of revenue, you become less dependent on your primary source and build wealth.

Before you begin here are a few things to know. There are two kinds of alternate sources that can generate extra income:

Passive Income: This is the best kind. Once you set this income stream up, it takes little work and continues to produce income. Example of passive income would be interest from a savings account, rental properties, or dividends from investments.

Active Income: This requires consistent participation to continue the income stream. This could be a home-based business, selling things on ebay, or consulting.

The secret is to develop as many passive income streams as possible. That off course is easier said than done, but lets take a look at a few things that you could do.

Cd’s, Bonds, and Savings: These are typically very safe investments and can generate anywhere between 2-6%. Not going to make you rich, but a little extra money each month into these types of investments does earn you income and helps increase you total savings.

Mutual Funds: These come with a bit more risk, but they can typically yield a lot better than 6%. A great source to see Mutual Fund ratings is Morning Star or check out Forbes fund guide 2007. They have a great rating system and have further information on the types of funds out there.  If you want to get started you can either contact the fund directly or open and investment account.  I have the best luck with Schwab.com (a bit more expensive but great customer service).

Rental Investments: Property is a great way to increase passive income if done correctly. The biggest mistake I see people make is going for appreciation as opposed to cash flow. If you structure your loans and programs to go for appreciation, you will find yourself in a crunch when the housing market dips down as it is now. If you take the other approach and go for cash flow neutrality with fixed loans, what you get is a property where total value in the short term is not relevant as long as rents remain flat or increase. How do you do this?

1. Buy only with fixed loans. When you do this you know you cost for the life of the loan and will not be subjected to a raising mortgage rate. On investment property, raising payments can quickly turn a property into a cash burning machine and if you can’t cover the negative cash flow you will be forced to sell or lose the house.  More on calculating and comparing loans.

2. If the housing market is going down rents typically raise. Why? Loans become harder to get and less people are willing to jump into a house at higher prices when they think the value is going to drop. This increases the demand on rentals therby pushing rents up.  This is good if you plan to purchase and investment property and your housing costs are fixed.

3. If you are cash flow positive or cash flow neutral and have a fixed loan you are less concerned about property price. This may seem odd, but if you can find an opportunity where you don’t burn cash on a monthly basis your investment is paying for itself. It has been proven over the last 100+ years that over the long run property increases in value. If you are cash flow positive or neutral a temporary drop in housing should not be an issue to you because you strategy is long term. Today’s housing market is tough to find cash neutral properties, but they are starting to surface. Be patient and you will find some.

If done right a good property investment can begin to generate large income in 20-30 years, plus you get the value of the property on top of the income.

Develop anything that has royalties. Do you have a talent like writing music or writing screen plays? If you have something good try submitting it to various organizations or industry people to publish. If you are lucky enough to get a break you could see great passive income. You don’t have much to lose to not try. Just make sure to take the effort to find the right people to get the word out on your work.  Also I recomend filing a copyright.  This can be done by following the instructions at the US copyright office. 

Create proposals and send them to Corporate CEO’s. Think this one is stupid? You would be surprised how well some good thought out ideas are received by corporate CEOs. However, before you go writing you idea on a napkin to send off to a CEO, make sure you do the following:

-Have a clear plan of action.
-Identify where and how your idea can create value to the product or company your are going after.
-Spend time to clearly write and format your proposal.
-Check spelling.
-Don’t reveal the entire story only enough to cause interest.
-Have knowledge of the company, its officers, and its ethics.

Ok, so you have the cure for cancer and your afraid to reveal it to someone for fear of losing the idea. Well that is the risk you must take and if done correctly can yield you great benefits. If it truly is a brilliant idea, then go after it yourself or file a patent. Point is, there are thousands of great ideas that most people sit on for fear of losing them. Usually these people make nothing from their ideas or wait so long that someone else eventually thinks of it. Can you relate, “oh that was my idea”, difference is that other person took action. If you don’t take action you will never succeed!

There are many other ways to develop passive income. I hope that I have inspired your thinking a bit. Now lets look at active income.

The best way to succeed with Active income is to find a way to get paid for doing the things that make you happy. Think about it, how much harder would you try if you were getting paid to play golf or make crafts. The challenging part is finding a way to get paid. If you are clever you could probably find a way to get paid for anything, just depends on how much time and effort you have to put into your idea.

One friend of mine loves to surf. Going to the beach every day does not bring in much income, so he decided to help out with some surf lessons in Malibu. He spent some time developing relationships with the parents and now every summer he has a thriving business teaching surf lessons to kids. He gets to be at the beach in the day and works his normal job on the off days and nights. Just one example how taking something you like and creating an opportunity out of it.

If you are a good writer, there are many companies now that offer paid posts or paid articles. This is another great alternate source of income. Probably won’t make you rich, but maybe bring in extra travel money.

There are many ways to succeed with alternate sources of active income. It is really just limited to your time and ideas.

Hopefully this will inspire you to think of ways to bring in alternate sources of income. Not all of them will be a home run and make you wealthy. In fact, failure is part of the game. However, if you fail at something you also learn and perhaps the next thing you try might be a home run. At the end of the day, if you are not trying how can you ever expect to hit the home run.

I will end with one thing I like to say: “There are no bad ideas, just bad execution”.

Subscribe to this blog's RSS feed

In an earlier post I mention some of the dirty techniques that credit card companies play to take your hard earned money.  Well, here is proof that they really do practice unfair lending practices with this example from Continental Finance.

Please visit this post by the consumerist:  World’s worst credit card (Continental Finance).

Wow, $53 card limit to start, 19% interest, $25 fee for each credit increase, $4 transaction for internet purchases, $99 account fee, $10 per month account fee, $49 one time fee, $15 lost card fee, $30 over the limit fee, $30 late fee. 

A few things the consumerist does not mention: 

The $25 credit increase fee is automatic unless you call and tell them you don’t want to be in the program.  Any time they increase your credit limit, $25 straight to your card.

You can dispute fees if they are over $50.  Kind of funny given the fact that the credit limit is $53 at the start. 

If that is not bad enough here is the advertising:

Low rates to 9%, free online access, great tools to manage finances, MasterCard accepted at millions of locations, Gold Card. 

Don’t believe it, give them a call and ask lots of questions: 1-800-518-6141 (or tell them how excited you are to apply). 

Lesson here, read everything before you apply for any card.  They are in the business of lending you money at the highest possible rates with out violating your rights.  That can be stretched pretty far. 

In my posts you will find a lot about car leases. Why, because it is one of the easiest places for consumers to get ripped off. I hope you will take the advice below and do the research necessary when leasing a car.

This example comes from a post I fund at edmunds.com in the town hall section of the website from a buyer that has done excellent homework:

—————————————————

“If I can get out to try to negotiate a 36 month lease tomorrow (Sept 4), can someone tell me if the following is a fair deal, or is it unrealistic?

They have a 2007 Q7 (3.6 Premium) with the following options:
Sunroof, Infotainment Nav, 4 zone climate, 3rd row seating, 19″ wheels, rear side airbags, convenience package. It says the MSRP is about $56000, invoice would be around 51700.

I read on here that there is an offer available for $4000 below invoice, bringing the cap cost to $47700.

I read on here the residual with Audi Care is 0.52, which would be $29154.

I read on here that if you take the $4000 below invoice, you can’t get the low MF, so would a MF of 0.00165 (~3.96%) be a reasonable expectation?

Using an online lease calculator, I calculate the following:
Capitalized Cost: 47719 (56010 MSRP minus discount)
Residual Value: $ 29154.00 (after 36 months)
Depreciation Fee:$ 515.69 - part of lease payment
Lease Fee: $ 124.92 - part of lease payment
Monthly Payment :$ 640.61 without tax
Usage Tax: $ 19.22 over full loan (3.00 % of 18565.00)
Total Monthly Payment: $ 659.83 including tax

So is a $640/mo payment (without tax) a reasonable expectation for this vehicle? Were any of my assumptions wrong? Is it unlikely that I can reach this deal in

Charlotte, NC where there are no other local dealers for competition?

If I take the 0.00014 MF and negotiate $500 over invoice, the payment would seem to be about $10/mo higher so I guess I could go that way too. I qualify for tier 1, but is $500 over invoice reasonable for the 2007s?”

—————————————————-

So, lets breakdown his offer step by step.

1. The price of the car. He has spent time researching the current incentives as well as the current invoice with listed equipment. The invoice for this car is around $51,700 as he found plus an additional incentive to sell this particular model $4,000 below invoice. So, his assumption of a reasonable cost of $47,700 is accurate.

*Note: Higher demand cars or limited production cars often do not sell at invoice. You can check particular data on what a fair price should be on many sites. I highly suggest kelly blue book or edmunds as two reliable resources. Also, you can check the Saturday ads in you newspaper to gauge what dealers are letting cars go for. It is good to compare the two sources.

Additional Resources:

KBB.com
Edmunds.com
Cars.com

2. Expected Residual: This one is tough. To find the exact residual of your car you have to do digging. This buyer was able to find it reading through posts. Another source is looking at what the average value of the car you are planning to buy is worth after 3,4, and 5 years. This can be done using KBB.com, but be cautious of any model changes that may alter the results.

What you are trying to determine is what the bank considers the value of the car after the loan term. For the Audi above, the bank considers the car to retain 52% of its value after 36-months. Some cars are higher and others are lower. Typically American cars such as Ford, depreciate faster then foreign automakers. The better your car holds its value the less you are going to pay for the lease.

Cars that hold value well are typically strong reliable cars with good resale values like the Honda Accord. You can also try doing a search for residual value “insert car”. Things should pop up.

*Note: Why is residual value important? In a lease you are paying monthly the depreciation of the car plus a money factor fee on that amount. The faster your car loses value the more your payment will be. You could have two cars that have large price differences but cost the same per month to lease. That is why you should only lease cars that have good residual values (hold their value better). Cars that don’t, buy them, it will be cheaper in the long run.

Also, for this same reason the typical optimal lease is 36-months. After that, cars really start to lose value and this affects your entire payment structure. Never buy a car on a 60-month lease.

Additional Resources:

MSN Auto Advice

3. Money Factor: This is the cost you pay to lease the car otherwise known as interest. The Money Factor is expressed in a four or five digit decimal number such as .00210. To convert this to an equivalent interest rate simply multiply the Money Factor by 2,400.

The Money Factor of .00210 is equal to a 5% interest rate. The length of the loan does not matter when doing the conversion. To go the other way simply divide by 2,400 and you can determine what Money Factor equals what interest rate.

The buyer again has shown great knowledge and done homework. The money factor should be in line with current financing rates. Typically, if a special is running on interest rates, some special is running on Money Factors. The buyer has determined that a fair rate given his credit and the market conditions is .00165 or just under 4%. This is probably a fair rate for the term when taking the rebate. If the rebate was not taken, then expect a much better lease factor. If you don’t know which to take please see this post.

Additional Resources:

Leaseguide.com
Swapalease.com
BankRate.Com

(Note: Leaseguide.com offers a pay product to help with a lease purchase. I firmly believe you do not need this product. While I am sure it is very well done, there is enough free information to help you if you are willing to take the time to learn. If the fee is worth it to you and you want to save time, then by all means purchase the product, but I truly think you can save your self some cash. I do not make any referral fees if you purchase the program, just my two cents.)

Now you are ready to calculate your lease:

The three components of a lease are your Money Factor, Price of the Car (cap cost), and residual (or depreciation).

For the deal above we know:

Money Factor is .00165
Price of Car is 47,719 (cap cost)
Depreciation is about .52 or 52%.
Residual is equal to (MSRP X Depreciation) = 29,125.20.

We know that the expectations above are fair from researching the cost of the car along with rebates available, market conditions for interest rate, and the expected depreciation of the car.

Here is how you compute your lease payment:

There are two parts, the depreciation fee and the finance fee:

Depreciation Fee:
Depreciation Fee = (Cap Cost - (MSRP X Depreciation) )/ term Or ( Cap Cost - Residual ) / term.
For the car above: (47,719 - (56,010 X .52)) / 36 = $516.49

Lease Fee or Finance Charge:
Finance Charge is equal to: Cap Cost + Residual X Money Factor(This is an approximate way to calculate the fee with out using accounting formulas)
Finance Charge = 47,719 + 29,125.20 X .00165 = 126.79

Your Lease Payment before taxes:
Lease payment = Finance Charge + Depreciation Fee = 126.79 + 516.49 = $643.28

Due to rounding and slightly different calculations the numbers vary slightly than calculations from the buyer, but the buyers calculations seems to be in line. Tax is every state is different, so make sure you know what you are suppose to pay for tax and exactly what is taxed. I would say the buyer in this case has come up with a great offer. In a follow up post, the buyer took the offer to the dealer and they accepted.

If you spend the time and do your homework, a lease can be very good option. If you don’t understand the calculations above and can’t do them on your own, don’t lease the car. If you must, find someone that can help you with this. There are to many places to add in profit and still make the deal look good to the buyer.

To close, here are just a few places they can add un-reasonable terms that you should be aware of:

Residual: Be careful on this one. They will always tell you the residual is set by the bank, this is true, but is it what they are giving you? If all the information you have tells you something different then what they are giving you, don’t buy the car. Go back home do more research to make sure you are right and then go to a different dealer.

Second warning: you want the residual to be as high as possible! This seems strange, but remember that most of the lease payment is the difference between the residual value and the Cap Cost. The smaller the number the lower your lease payment.

Unless you plan on buying the car after the lease, any down payment or money towards lowering the residual value is wasted. Think about this one. The bank says a car is worth 25K at the end of the lease, why would you want to pay money to bring this value down to 20K when you just plan to give it back? That means you gave the bank 5K you did not need to give them. Lets look at it in terms of rent for a house. What if a landlord told you the rent is $800 per month, but you need to put a down payment that is equal to 10% of the house price. This down payment you don’t get back when you leave, would you do it? I hope not, same with a lease.

One last thing on residual. It is always MSRP X Depreciation. Be careful, they may try to show you a residual value that is your cap cost X Depreciation (This assumes you are not paying more than the MSRP). If they calculate your payment based on a lower car price it lowers the residual value which is the opposite of what you want to do.

Lease Factor: They may not want to share this with you. If they don’t, you will have to do your own calculations. I would suggest if they don’t show you the Lease Factor then leave.

Monthly Payments: My biggest rule, do not negotiate the monthly payment. The payment is a function of depreciation, lease factor, and car price. You can negotiate all these factors and if you do well the monthly car payment will fall where you expect it to.

Mileage and other fees: Check what they are and make sure you will not be stuck with a big fee at the end of the lease. Mileage caps add up fast when you are charged .15-.25 per mile. If you are over by 10K miles you will be looking at a $2,500 penalty.

Be careful.Good luck, do your homework, and you will not get ripped off.

Please leave comments with your strategies for others to read!

 Photo Courtesy TidalStock.

1. Your pay check direct deposit account is the bank that holds your car lease.

2. The president of Visa sends you personal gifts every Christmas.

3. The currency of your savings account is in Apple itune denominations.

4. You bought an Apple iphone or x-box 360 on day one.

5.Your credit card monthly payments will not pay off your credit cards before you die.

6.Your idea of a budget is keeping your credit card under the limit.

7.As you drink you daily $4 cup of Starbucks coffee, you sign your health insurance forms to drop your insurance because you can’t afford the extra $60 per month increase they just sent you.

Apple announced that it has cut the price of the iphone by $200, bringing down the price to $399 from the hefty $599 (a 33% price drop in under two months). This is by far one of the hardest lessons learned to early adopters of the Iphone. That is quite a price to pay to be first in line.

While the exact reasons were not discussed, it is probably save to assume that Apple wants to meet the one million target it gave the Street by the end of this month. Missing this target would appear far worse than upsetting the loyal customers that waited in line to buy the Iphone in the first few weeks of its release.

Investors, however, did not take the news lightly. They brought down the stock by 5% in trading today closing at $136.76. This will be of little concern if Apple succeeds at beating the target 1M mark before the end of the month. At $399, the phone now competes directly with most other carrier’s smart phones.

Let this be a great example to the rule of buying new technology before it has had a chance to mature. In almost any product line, if you can wait to the next version you will usually get a better performing and lower priced product.