I think when most people think of getting a raise or pay increase, they think of making more money at work. Maybe by getting a promotion and making more, or moving up a step on the pay scale. Or making more sales, getting a bonus, or even starting a business.
There’s another way to look at getting a raise that I never thought about prior to a few years ago. I understood the concept of passive income, but never realized its full potential until changing my mindset and opening myself up to new ideas. The concept that passive income can actually provide us with raises blew me away.
For this piece, I’m going to provide two examples of how passive income can give us a raise. Although there are myriad other ways, two examples should give us enough to display the power of passive income raises.
Real Estate
We’ll start simple here using a fictional character as an example. Shawn purchased a small three-bedroom house seven years ago. He lived in it for three years then moved into the house he’s currently living in. Since his first house is in a high demand rental area, he was able to rent it out within a few weeks of moving out.
Shawn originally charged $1,350 in rent which covered principal and interest, taxes, insurance, repairs, capital expenditures, and vacancies allowance. That left about $125 per month in cashflow. Not much, but good enough for Shawn to hold onto the property.
Since that time, rents have steadily increased.
- Second year: $1,425
- Third year: $1,510
- Fourth year: $1,590
- Fifth year: $1,660
Shawn’s expenses have only slightly increased on the property, and taxes have remained the same. He put the loan on a 30 year note so his monthly payments are a fixed amount.
At the start of year two of owning the property, Shawn was making $75 more per month than in his first year of renting out the property. That increased his monthly cashflow on the property to $200 per month. For the following three years:
- Beginning of year three, he made $160 more and $285 in cashflow
- At the start of year four, he made $240 more and $365 in cashflow
- Beginning of year five, he made $310 more and $435 in cashflow
After Five Years Time
In just five years, Shawn has steadily received rent raises now totaling over $300. This has increased his monthly cashflow to over $400 per month. That’s just in passive income. During this time, Shawn made only a few minor repairs to the property and no large improvements.
This wasn’t a “too good to be true” situation for Shawn. He still spent a little money on minor repairs and had three weeks’ vacancy between the first and second tenants. Even with that, his monthly cashflow increased steadily, providing him with a nice raise.
The example with Shawn is an example of someone with just one property. Imagine someone with multiple properties receiving these same rent increases—that’s a substantial raise.
Stock Market
Sally has been investing in index funds for the past 30 years. Starting at age 25, she started small and gradually increased her contributions as she received pay increases at work. She continues to invest in the market even though she no longer works full time.
Over the course of 30 years, Sally built up a good amount of money in her portfolio, allowing her to retire earlier than expected. She calculated that she needs $50,000 per year to live comfortably in her first year of retirement. With no consumer debt and a small house payment, Sally is in a really good position to be able to cover basic expenses and have plenty left over for travel, entertainment, and miscellaneous items.
Pay Increases
Sally also decided that in retirement she wants to give herself pay increases to keep pace with inflation. Very conservative in nature, Sally is going to start by withdrawing $50,000 per year and two percent more each year to account for rising costs. Sally could conceivably give herself larger raises than two percent, but she feels better taking less. She made a deal with herself to reassess her situation if she’s feeling like that’s not enough.
Her first five years of retirement will look like this:
- First year: Withdraw $50,000
- Second year: Withdraw $51,000
- Third year: Withdraw $52,020
- Fourth year: Withdraw $53,060
- Fifth year: Withdraw $54,121
Even though Sally is no longer working full time, she is still receiving passive income raises. Even better, her investment portfolio continues to grow because she’s only drawing a small percentage of her portfolio each year.
Related: What is the FIRE Movement?
Changing Mindset
If someone would have told me years ago that it’s possible to get raises without working I wouldn’t have believed them. I was starting with the basic assumption that in order to get a pay raise, I had to be actively working. It never even occurred to me that anyone could get a pay raise from passive income.
Education changed my mindset. The more I began to understand how money works, the more I began to see new possibilities. The concept that money can actually earn more money for you, and give people raises without working was mind blowing to learn.
How can you earn raises through passive income?
