Yesterday, we introduced Scott, one of the creators and stars of the success documentary, Pass It On.
Scott wanted to know if his royalty streams (he is also a prolific inventor who teaches others how to invent) meant that he was a multimillionaire.
I’ll leave you to read that post, but the answer, as you may have guessed, is “yes … but” with the ‘but’ being that he has to guarantee his future income by building his own Perpetual Money Machine!
Unlike the world of Newtonian physics, where it is impossible to build a Perpetual Motion Machine (most closely approximated by those desktop ‘toys’ with the liquids or magnets that seem to rotate and swing ALMOST ‘forever’), it is actually quite easy to build a Perpetual Money Machine:
This is ideal – and, quite necessary – for anybody who has an income stream that they want to guarantee …
… and, isn’t that everybody with a job, or in business?
Our Perpetual Money Machine needs two components:
1. An income ‘energy source’ – a source of cashflow to ‘seed’ the machine
2. An income ‘capacitor’ – a means to store/recycle the financial energy until an excess is created
This ‘money machine’ becomes ‘perpetual’ when enough cash begins to spin off to become it’s own energy source …
… but, it becomes useful when it (soon after) also begins to spin off excess cash that we can spend!
Fortunately, this is a lot easier to ‘build’ (at least, in principle) than it is to describe.
Let’s take a simple example:
Joe is working at his job; he earns a income – that’s his ‘energy source’: his weekly paycheck.
Instead of opting to spend all of his money, he decides to ‘seed’ (i.e. save 15% of his gross salary) his ‘capacitor’ (in this case his 401k) until he has amassed $2 million. This takes Joe 30 years.
Joe then retires, reinvesting his nest egg into various ‘safe’ investments (as recommended by his financial adviser) that return 10% every year (in this Utopian world, there are no variances from ‘average’) which is 5% above inflation (ditto for inflation) and Joe can safely spend 5% of a pie that keeps growing with inflation, well, pretty much forever.
Of course, Joe had to work for 30 years to achieve this result and we had to suspend the laws of ‘financial physics’ to make it work, so let’s build Scott a ‘real’ Perpetual Money Machine:
Scott has a current income from his royalties: this is his ‘energy source’ and we can trust Scott to continue to build this energy source even further, but he realizes that all energy sources eventually dissipate.
So, instead of spending all of it, Scott puts at least 15% of his income from his inventions/movies/etc. towards his first capacitor (where he temporarily stores it is of little consequence; a bank is ideal).
Why 15%?
Well, we assume that until now, Scott has been spending all of his income in the belief that he already had a ‘perpetual money machine’ … if not, then maybe Scott can begin with even more than 15% 🙂
As Scott increases his income, now realizing that it is not ‘perpetual’, he also diverts at least 50% of the additional income towards building his Perpetual Money Machine … he sacrifices a little bit of ‘current increased lifestyle’ for ‘guaranteed future lifestyle’.
When Scott has ‘enough’ (and, that is up to Scott to determine) he ‘seeds his income capacitor’ by purchasing an investment property: if Scott wants a series of ‘small capacitors’ he buys residential (houses, condos, up to quadraplexes); if he wants a ‘large capacitor’ he buys commercial (multi-unit apartment complexes, offices, strip shops, etc.).
My recommendation is that Scott uses the largest ‘capacitor’ that he can afford right now … he can always trade up later, if he wants to consolidate into fewer capacitors/properties.
Now, does it have to be real-estate?
Of course not, it just needs to be anything that you can buy/hold that produces an income: it can be divided-producing stocks; Berkshire Hathaway shares (no dividends, but we’ll deal with that later); etc. … but RE is ideal because it can be well-leveraged, eventually produces a mostly-reliable income, but is stable over a long holding period: very handy attributes for a ‘financial capacitor’.
Scott repeats the above process until a magical point in time … when the Perpetual Money Machine starts to wind itself up!
To be continued … 😉
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