One of my concerns with the possibility of leaving my day job and pursuing self-employment through writing and managing websites is the unpredictable income. At the extreme, my biggest concern is the idea that it’s quite possible that the income could drop off permanently due to forces beyond my control. But even if that doesn’t happen, the ability to earn income from blogging and such could vary widely from one month to the next.

Budgeting can help, but the problem with a budget is you have to assume a certain amount of income. That’s the first suggestion from Money Magazine in a recent article about living well on a “flexible” income. The article suggestions taking your lowest annual earnings from the last five years, divide that number by twelve, and use the result as your monthly spending limit.

It would be a good idea to inflate your emergency fund. The typical advice for an average person calls for three to six months’ living expenses in a liquid savings account (though you might prefer a more tiered approach to an emergency funding plan). People with unpredictable income may benefit from beefing up the emergency fund to cover one year’s worth of expenses.

Is that too much? If I were approaching a year without income, I probably would have found another job by then, taking what I could if necessary. I suppose it depends on the marketability of one’s skills.

The Money Magazine article warns about underestimating your financial needs in retirement. Rather than anticipating that you’ll need 80% of your income once you retire, a rule of thumb touted by some, look at your current expenses and try to determine what they might look like when you no longer have the desire to work. Perhaps there are some expenses you could reduce while other expenses might increase. Focus on the necessary expenses rather than the income needed.

If you plan for a conservative income, it’s likely you’ll have excess some years. Money Magazine suggests using your surplus cash to build or replenish your emergency fund first and pay off debt. Additional extra cash can be saved or spent.

Insurance should be a concern, too.

For life insurance, consider what portion of your yearly expenses won’t be covered without your salary. Multiply that by the number of years you want coverage (until your kids finish college or you hit retirement is typical). Add in any big stuff like kids’ college costs.

While the article is geared towards people who work for an employer and have an unsteady income, like someone who works on a 100% commission basis, the advice works for independent consultants who need to find clients and other self-employed individuals.

5 ways to manage a ‘flexible’ income, Amanda Gengler, Money Magazine, September 2, 2008

I mentioned in my August net worth report that there were three main reasons for my 7.7% increase. One reason was the stock market, which slightly lifted some of my investments. The other two reasons should be apparent from the income and expense report that is included in this post.

My net income for the month was $11,582. That’s the highest monthly amount on the bottom line I’ve ever had when not including realized gains. In fact, my August total beats my 2004 full year total. Continue reading for the full report and details. Click on the image for a larger version of the report.

My balance sheet provides a decent snapshot of my current financial state, but it doesn’t tell the complete story. While I have control over most of my investments and could sell poor performers and buy others if I so choose, I’d rather stick with what I have for the long term. Therefore, monthly swings in my balance are often due to forces beyond my control, like the health of the economy and the stock market.

That’s why I’ve been including an income statement each month. This report presents the details about the sources of my income and the destinations of my “outgo.” This was a successful month, netting $7,731 after expenses. For the year, I’ve managed to save almost $50,000. That includes money that I’ve invested as well as what I’ve deposited into savings accounts.

Here are the details. Click on the thumbnail for a larger version of the report. Read the rest of this article »

Bill Miller, the manager of Legg Mason Value Trust, shares some advice about building wealth.

[My father said…] “See this ‘plus .25’? That means that if you own one share of this company today, you have 25¢ more than you had yesterday.” I had come in from mowing the grass for three hours to earn 25¢. So the lesson I took was that in the stock market you can make money without doing any work… Of course, I realized only many years later that you could earn the market rate of return by doing no work, but to earn an excess rate of return certainly does require some work!

Passive income is an attractive thought. Dumping money into index funds and holding onto the investment for decades can provide results that beat most of the active fund managers. This contradicts Bill’s advice—it’s quite possible to do a large amount of work in terms of researching stocks but perform worse than the indexes.

The most passive form of income has to be that returned in the form of interest on savings accounts. Saving accounts, however, won’t provide much interest. When it comes to passive income, I’ve already stated that certain activities don’t qualify, like blogging and real estate investing, because you certainly are trading some portion of your time for that income. The Amateur Asset Allocator goes farther by outlining eight levels of passive income.

The Smartest Advice I Ever Got, CNN Money, July 22, 2008

Money Magazine released the results of the publication’s survey of the towns with the highest median household income. New Canaan, Connecticut tops the list with a median income of $231,138.

Considering a move to help your income go farther? Don’t choose one of these locales. Considering a move to be closer to culture, leisure, and advanced education without living in a city? These towns might be for you. Here are the top ten.

1. New Canaan, CT, $231,138. “New York City’s elite once chose New Canaan as a vacation town, but they liked it so much, they decided to stay there year-round and turn it into one of the nation’s wealthiest residential communities.”

2. Darien, CT, $218,130. “Darien was once a vacation community for New York City’s upper crust who decided to lay down year-round roots.”

3. Lake Forest, IL, $212,122. “With a town plan heavily influenced by English gardens, Lake Forest is home to mansions and vast estates seated on the bluffs overlooking Lake Michigan.”

4. Saratoga, CA, $196,420. “The [Paul Masson] Winery is still there, but so are the best and brightest of Silicon Valley, whose fortunes have spilled over into this upscale bedroom community.”

5. Westport, CT, $193,540. “Once an artist’s colony, Westport is now better known as an affluent bedroom community on Long Island Sound that’s held on to its cultural roots.”

6. Los Altos, CA, $189,839. “The village, in San Francisco’s Bay Area, has become a haven for techland’s top earners. Still, the birthplace of Hewlett-Packard prides itself on maintaining a semi-rural feel.”

7. Potomac, MD, $183,258. ”[M]uch of Potomac has been turned over to the Washington, D.C., area’s wealthiest residents… If you are of an equestrian bent, the area still offers a number of riding schools, breeders and stables.”

8. McLean, VA, $180,103. “If you want your neighbors to be rich AND powerful, move to McLean. Vice President Dick Cheney is said to be building a home there for when he leaves the West Wing… [B]e careful who’s listening: The CIA is headquartered in the town’s Langley area.”

9. Wellesley, MA, $172,900. “The Boston suburb is home to the school of the same name, which is consistently rated as one of the nation’s top liberal arts colleges. Notable alumni include Senator Hillary Clinton…”

10. University Park, TX, $170,150. “University Park started as a group of houses surrounding Southern Methodist University almost 100 years ago. Since then it’s been swallowed up by Dallas’ urban sprawl, but the area still likes to maintain its identity.”

Other towns in the top 25 include Bethesda, MD, Greenwich, CT, Ridgewood, NJ, Los Gatos, CA, Deerfield, IL, and Garden City, NY.

25 top-earning towns, Money Magazine, June 14, 2008

In June I managed to save over $4,000 of my income for myself after all expenses were paid. That doesn’t mean that my net worth grew during June, however, as I explained earlier today. While I was able to add to my savings and investments, poor performance in the stock market caused my accounts to decline, which I hope is a temporary situation.

This post contains a look at my income and expenses for the month of June, though some lines are ignored to present a report that is a mix between an income statement and a cash flow report. I don’t bother with unrealized gains or losses here, but I don’t include money transferred to savings as an expense.

Continue reading this article to see my financial data for the month of June. Read the rest of this article »

When you’re a world class professional athlete, you’re in high demand. When you’re the best, or nearly the best, at your particular skill in the developed world, the payoff can be huge.

For example, right now, there is no one on this planet who can compare skills with Tiger Woods. Yes, every person in this world is unique and every person is special, but Tiger is special in a way that could increase the golf industry’s revenue by a billion dollars or more. He’s special in a different way. People will come from across the globe with open wallets to see him play. When Tiger is seen drinking Gatorade, the company that manufactures Gatorade believes he will inspire the world to do as well, with open wallets.

That’s why Tiger, through his winnings and endorsements, earned approximately $128,000,000 last year alone.

There are no surprises in the top ten earning athletes:

1. Tiger Woods: $22,902,706 from salary and winnings, $105,000,000 from endorsements
2. Phil Mickelson: $9,372,685 from salary and winnings, $53,000,000 from endorsements
3. LeBron James: $12,455,000 from salary and winnings, $28,000,000 from endorsements
4. Floyd Mayweather Jr.: $20,000,000 from salary and winnings, $20,250,000 from endorsements
5. Kobe Bryant: $19,490,625 from salary and winnings, $16,000,000 from endorsements
6. Shaquille O’Neal: $20,000,000 from salary and winnings, $15,000,000 from endorsements
7. Alex Rodriguez: $29,000,000 from salary and winnings, $6,000,000 from endorsements
8. Kevin Garnett: $22,000,000 from salary and winnings, $9,000,000 from endorsements
9. Peyton Manning: $17,500,000 from salary and winnings, $13,000,000 from endorsements
10. Derek Jeter: $22,000,000 from salary and winnings, $8,000,000 from endorsements

So who of these mass earners have established foundations?

Tiger Woods has the Tiger Woods Foundation. The foundation established the Tiger Woods Learning Center, where children develop their character by learning how to achieve their goals and reach their dreams.

Phil Mickelson runs the Phil and Amy Mickelson Charitable Gift Fund. This charity was a strong supporter of relief efforts following Hurricane Katrina and is a continuing supporter of Homes for Our Troops.

LeBron James is part of the LeBron James Family Foundation. Recently, this foundation has been working to build playgrounds in communities across the United States.

The Floyd Mayweather Jr. Foundation was created last year. This organization seeks to use construction, entrepreneurialism and education to encourage community alliances, youth leadership and stronger families.

In 2003, Kobe Bryant closed down his Kobe Bryant Foundation amidst the athlete’s sexual assault charges. Kobe now runs the Vivo Foundation, “a charitable initiative dedicated to enhancing the lives of young people and making dreams come true through educational and cultural enrichment opportunities and financial support.”

Shaq manages his Real Model Foundation, which has been noted in the press as being an adaptation of the term “role model” but with an emphasis on the idea that role models should be real. Actual details about this foundation and the work they have done is unclear.

Alex Rodriguez and his wife Cynthia run the AROD Family Foundation. The foundation’s mission is “to positively impact families in distress by supporting programs focusing on improved quality of life, education, and mental health. The foundation supports Boys and Girls Clubs events, the Children’s Aid Society, and other organizations.

Kevin Garnett’s foundation is called “4XL – For Excellence in Leadership.” This organization “connects minority high school and college students with business leaders and internet-based guidance, while preparing them for business-related careers and entrepreneurship.” The most recent information about this organization’s activities date back to 2003.

The PeyBack Foundation, run by Peyton Manning, seeks to help disadvantage youth build futures for themselves. This foundation has a strong presence in Indiana, Tennessee, and Louisiana, and also was a significant contributor to relief effort following Hurricane Katrina.

Derek Jeter launched the Turn 2 Foundation, Inc. in 1996. The foundation has awarded more than $8 million in grants since that time. Turn 2’s mission is to “motivate young people to turn away from drugs and alcohol.”

When it comes to foundations run by athletes, Major League Baseball seems to have a great handle on the organizations run by its players. These foundations, like AROD and Turn 2, in addition to the Tiger Woods Foundation, appear to be the most professional and well-managed of all the celebrity foundations. It is surprising to see how much information was not available pertaining to the foundations run by the other athletes.

The Fortunate 50 [Sports Illustrated]

There is a certain allure to the idea of “passive income.” After all, who wouldn’t want a continuous stream of income without having to trade your time or effort for it? But true passive income is quite elusive. True passive income can be defined, and is defined by the Internal Revenue Service, as “cash flow generated by activities in which the tax payer does not materially participate.” But outside of portfolio income, cash flow generated solely by appreciation of an asset like a stock (and liquidation of the earnings), there are few examples of true passive income.

Even Wikipedia gets it wrong.

Real estate: the classic example is false. Rent on a habitable property is generally called “passive income,” but it’s not. If you want to have tenants and consistently earn income from the property, it must be maintained. At the simplest level, as a landlord, you must interview prospective tenants, arrange background checks, respond to maintenance issues, keep the property attractive and in working condition, process rent payments, draw lease agreements, and maintain connections with plumbers, electricians, painters, and real estate agents (or do that work yourself). Even if you outsource management to an outside firm, you must develop the contract and oversee the management.

The more work you’re doing, and being a landlord is a lot of work, the less passive your income is. Outsourcing more of the work results in less income overall.

You won’t hear about this in the motivational books and seminars, but the only way to ensure high cash flow from real estate is by owning and renting out a lot of properties, and outsourcing the management of all of them. Incredibly high volume would hopefully make up for the thin margins due to outsourcing the management. But building this real estate empire takes the kind of time and effort that those with “passive income” written on their forehead with indelible ink may not understand or accept.

The allure of AdSense. Time and time again I hear from people who are excited and motivated to start a blog with the intent of throwing up some advertising to earn passive income, expecting almost immediate returns. Unless you plan on scraping other websites and stealing their content—and if you do, I hope those who provide the income will discover this tactic and stop providing the income to you—this concept is miles away from the idea of “passive income.” While there are always exceptions, for the most part you can’t just throw up a website, add advertising, and expect passive income to roll in.

If you want to really earn money online, you have to work. You must create lots of content, relevant content, and you must continue doing so. This is highly active income, not passive.

Like the real estate empire, you could simply register hundreds of domain names—there are programs that will do this for you, for a fee—and throw up one page on each full of advertisements. With incredible volume, you’ll make more from your thin profit margins. But what benefit does an empire of hundreds of websites devoid of content provide to the internet at large? It just creates more junk websites that are nuisances to anyone who is attempting to properly perform research on the internet.

This seems like a strange message coming from me. I’m earning a multiple of my day job’s salary by working with the web in my “spare time.” But this work is so far from what anyone could consider “passive income” that I’m almost insulted when I hear that. My strongest efforts wax and wane with the moon, and so does the resulting income. Consumerism Commentary won’t “run itself” and continue generating income for long.

In general, I have an option: either be a positive force, adding to the wealth of information online, even if the information is more interesting to me than to anyone else, or don’t do it at all.

When I read about the truth about earning money from real estate, like in The Complete Real-Estate Investing Guidebook by David Crook, rather than ambiguous, motivational bull (I won’t mention any specific authors, but you know who you are), I see that real estate management is not truly passive income, and success won’t come for most people who try, particularly those after a quick buck. I know from experience that the same holds true for earning money online.

Simply: If you want to earn income, you have to work for it; that is, income is active. The IRS may call certain things “passive income,” but the term itself is a lie.

Things are a little different from an investor’s point of view, and I’ll tackle that approach soon.