If there was a guaranteed way for you to be financially liberated, would you do it?
If you answered yes, you're in luck. Watch Russ Morgan, Partner at Wealth Without Wall Street, share his expertise about attaining financial freedom at a recent RLS summit presentation titled Turn Active Income Into Passive Income.
The formula for attaining financial freedom by turning active income into passive income is simple: Financial Freedom = Passive income > Expenses. As always, the devil is in the details. In this article, we'll go over Morgan's expert advice and best practices to help you on your way as you turn your active income into passive income and become the master of your financial future.
Establish an income account separate from your business account and personal checking account.
An income account is an accounting entry that tracks revenue generated. This account is typically part of your company's current assets. It's divided into rent, services rendered, investments, and interest earned.
The income account also tracks the amount of money coming into the business. It records any discrepancies between expenses and revenues. You can use this information to measure your overall performance and decide how best to manage your finances. It is also a key component of financial forecasting and budgeting.
A life insurance line of credit (LILOC) is a financial product that combines the convenience of a revolving loan with the death benefit of an insurance policy. It allows you to borrow against the death benefit of your life insurance policy, up to a certain percentage of its face value, and repay it over time as long as you meet the terms and conditions of your lender.
The life insurance policy and death benefit typically secure the loan, making it an attractive borrowing option for those who don't want to tap into their other financial assets or take out a traditional loan. In addition, if you pass away before you repay the debt, the remaining balance will be paid off using the death benefit from the policy, thus relieving your surviving family members of any financial burden.
You would use a LILOC as an interest-only revolving credit line collateralized by the cash value of a whole life insurance policy. Instead of purchasing liabilities with this line of credit, you buy assets that produce a return.
Possible ways to spend LILOC money include, but are not limited to:
This example illustrates how you use active income, income accounts, and LILOC to generate passive income. It is not a guarantee of performance.
Suppose your business generated $100,000 in income. You would put $100,00 in an income account, then:
You enjoy a revolving credit line via your LILOC and have access to its cash value, potential investments, and a way to pay taxes.
Using the government's money is better than using your money. That's not a controversial statement. You can use the government's money by choosing to forgo paying quarterly taxes.
What follows is not tax advice but a strategy for making money work for you.
Instead, you could send any extra money (less your expenses) into your LILOC (or other investment accounts). You'll use the money you don't spend on taxes on other assets. Typically, the return on your investment will be higher than the late penalty on your tax bill.
As long as you pay your taxes by April 15th of any given tax year, you'll pay a 2% late fee. Instead of holding the money in an account, you're using the money to build wealth.
Income accounts and LILOC are effective strategies for converting active income into passive income. An income account is an accounting entry that tracks money received from revenue-generating activities.
A life insurance line of credit combines the convenience of a revolving loan with the death benefit of an insurance policy, allowing you to borrow against it up to a certain percentage of its face value. You can build passive income by investing the money you save on taxes in a LILOC or other investment account.
Lastly, it is essential to remember that these strategies are not guarantees of performance, and you should consult with a professional to discuss your goals.
Join our Royal Investing Group Mentoring to learn how to turn active income into passive income. We'll also discuss the finer points of real estate investing and provide strategies for you to build wealth and secure your financial freedom.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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