I was talking with some colleagues at work last week, and discussion swung around to topics along the lines of “are you going to do this forever?”. Most were answered in the same vain:

Colleague 1: “I’ll have to. I can’t afford to take a pay cut.”

Colleague 2: “I’ll have to. I’m £2k overdrawn as it is.”

Colleague 3: “I’ll have to. I have kids at college.”

When it came my turn to answer the question, they all scoffed, laughed and told me I was a dreamer. I said “I intend to work for another 10 years, and retire from the mainstream rat-race when I am 38.”

There were a variety of replies. Some profane. Some full of mock-encouragement. All disbelieving in some way. I was so shot down that I didn’t even really get a chance to explain how I hope to do it, and their cutting remarks actually made me wonder if it is just a pipe dream to be able to give up mainstream work and live a dream instead.

What is Passive Income?

Before I delve further into my dream perhaps it is worth spending a moment explaining just what a passive income is, as not everyone will quite understand.

In short, a passive income is something of which you have applied resources to, and which continue to provide resources in return now and later. (Thanks to Trent @TheSimpleDollar for the premise).

If that sounds a bit vague, it is. An actual example would be buying dividend-producing investments (using a current resource – cash) which will provide a resource now and later (dividends). Another example would be to write a book (resource – time) providing a royalty revenue stream long after the time ceases being spent on it.

My Passive Income Plan

It was probably a good thing they didn’t ask what my plan was, because I’m not sure I could have explained it there and then and kept their attention at the same time. But I got thinking – what IS my plan? It needs to be a half decent one for this to work.

Amongst my own plans in general, I’ve taken a hint of inspiration from @FinancialSamurai’s Plan, which he discusses in quite some depth.

Time Rich, Not Cash Rich

It’s important to note that I don’t intend to become ‘cash rich’ from my dreams. What I want to be is ‘time rich’. I’d like to step off the hamster wheel of normal work, and instead focus on things I find rewarding such as charity and volunteering. If my standard living costs can be all but covered by passive streams of income then the time I’d ordinarily spend labouring away for an employer can instead be redirected towards giving.

Continue Blogging

I’d like to drive my passion in blogging further and become a ‘professional’ at it. Quite where the line between an ‘amateur’ and ‘professional’ blogger is drawn I’m not sure, but to be able to count your blog as a significant passive income source would be a good start on crossing that line.

Stocks & Dividends

I subscribe to the ‘Oblivious Investor‘ mode of thinking when it comes to investing in stocks and shares. My current holdings pay pittance in dividends, and my banking sector is particularly dismal at this moment in time. But, because I’m playing the stock market for a longer-term goal, I’m not actually bothered that I’m losing (on paper) 5% a month. At some point things will rebound as they always do, and we will go from bust to boom once more and I can cash in on that.

The principle of Pound Cost Averaging is also in my favour, as I mostly started buying when the market was on its way down.

One thing I do need to do is begin a dividend pool. At the moment while some of my holdings will provide an income of sorts either through sale or unintended dividends I need to start actively thinking about options that will provide a sustained, regular high dividend stream.

Shout out and thanks to @Monevator for the Lazy Portfolio write-up as well. There are some great ideas within.

Write Books

One of my many passions is writing. I like to think that I can get across complex concepts and ideas without actually giving people brain ache. It also pains me to still see that despite attempts last year, there is still no compulsory school-level education on managing personal finance and money.

I’d like to combine the two and write a book aimed at the 16-21 year old market about doing just that.

Is It Just A Dream?

Not necessarily.

Assuming I need £800 to ‘live’ per month, then a passive income stream could bring me most of the way there, with careful planning. A part-time job of say, 16 hours a week could provide money to ‘live’ with. As with all dreams, anything is possible; you get out of it what you put in.

If it stays a dream then yes, it is just a dream. But if you work to make that dream a reality, then who is to say you cannot succeed?

What’s your plan?

If you have a plan for jumping off the hamster wheel too, come share it in the comments.

It’s been a very long while since I have written an update about my stocks and shares ‘experiment’, so I thought it was time I wrote up a quick post as to how I’m getting on.

My trading platform of choice (iii) had a free trading day on Friday, so I took advantage of that to re-allocate, re-balance (a bit), and generally have some fun without the commission on top.

Prepare yourself for some weekend laughter, probably directed squarely at my direction! It’s ok. I can take it.

Disclaimer

I’m an oblivious, amateur, very-long-term-outlook investor. I am not a financial advisor, and none of the advice found on this website should be construed as financial advice. It isn’t. This is what I am doing. If you choose to follow me, you can cry in your own beer instead of mine.

Deal?

My Current Allocation

Click for larger view

Slightly over three-quarters of my asset allocation currently sits within the UK banking sector. This is one of my longer term positions, as the majority of the assets within that sector are priced significantly below what they have historically run at between recessions.

The remainder is split between:

• ~3% iShares FTSE EPRA/NAREIT UK Pty (IUKP)
• ~10% iShares FTSE 100 (ISF)
• ~10% HSBC Japan Index Ret Acc

My Stock/Fund Purchase Method

I purchase my stocks and funds via iii.co.uk, which has one of the easiest to use trading platforms I’ve seen. I use their Regular Investment system to automatically purchase a pre-allocated sum of money against a pre-set purchase list of my choosing. They then conduct this trade at a time to suit them (within that month), keeping costs low.

This automated method is suitable for me as I’m taking the Pound Cost Averaging route over the longer-term view, so hitting spikes or not taking advantage of unusual lows is of a lower priority for me than most day-traders would even consider.

With the exception of last Friday, where they had a zero-commission/no-fee day for ISA stock purchases, so I have thrown an extra £100 into the pot more than usual and had fund hand-picking my targets.

My Stock/Fund Storage Method

All my trading is conducted within an ISA to shelter me from (most) tax liability. If you are doing stock trading for yourself, under £11,280 per annum, you really should be doing the same. For more information on ISA’s check out my ‘A Guide To: Individual Savings Accounts‘.

Profit / Loss Report

Ah. We have come to the sick part. But it is fine! This is not a short-term operation, and I am mildly optimistic that at some point things will rebound.

Currently across all sectors, I am -26.91% in terms of purchase-cost v. current actual. That smarts a little bit, but I’m going to smile anyway because in 2, 5, 10, 20, or 500 years time, it’ll swing the other way.

Right??

Did you blink? The last financial year comes to an end at the close of trade today (Thursday, 5th April) and if you still have an allowance in your 2011/2012 ISA, now is the time to be sending those Faster Payments or internal transfers to it. Any transfers that clear after the close of business today will not count!

If you are unsure of when your ISA provider closes, give them a very quick call!

See my feature article A Guide To: Individual Savings Accounts.

Your Cash ISA allowance for this year is £5,340, and rising to £5,640 as of tomorrow (2012/2013). If you’re short of that figure, be sure to take advantage of the tax-free savings an ISA can bring. Do remember though that if you have taken money out of your ISA you can’t put it back. If you have raided that particular piggy-bank, you will need to calculate what your remaining allowance is.

For the numerically challenged (I include myself in that statement), this can be easily worked out as follows:

£5,340. Minus whatever you have put into your ISA, regardless of whatever you have taken out.

Whatever is left, will be your remaining allowance (if anything).

I’ve seen some weird and wonderfully confusing sums to perform for this same calculation but that really is the simplest way of doing it without getting overly fancy about the whole thing. The bottom line is you can put in to an ISA, and you can take out what you’ve put in, but you can’t then put back whatever you have taken out. It’s a one-way savings account.

Your Stocks and Shares ISA allowance is also £5,340 and will close at the same time, using the same rules. The 2012/2013 total allowance will rise in total from £10,680 to £11,280.

Be sure to shop around for next year’s ISA – do not automatically assume the one you have is the best out there. Shop around, and look for the best interest rates, no management fees (unless the rate offered significantly trumps those fees), and make sure transfers in are permitted to take the most advantage of the given rate.

Happy Tax Free Saving!