Building a Residual Income

In an earlier post, A Simple Way to Assign Value to a Company we discussed how to valuate a business based on the income generated by the business.

This concept was used in the article How Do You Include Residual Income in Your Net Worth? to explain why a business which generates $100/month is worth $24,000.

In fact, the same concept underlies Izu's 100/200 Property Valuation Rule, which is the valuation of a specific type of residual income, mainly a rental business.

Some critics, express concern that the concepts and rules in the above articles are over simplified.  In fact, they may appear to be elementary.  However, there is a lot of thought behind these simple concepts, so don't take them for granted.  Albert Einstein once said, "If you can't explain it simply, you don't understand it well enough."  The purpose of a mathematical model is never to make perfect predictions about the future.  On the contrary, the purpose of a mathematical model is to make educated predictions about the future.

While 95% of people focus on saving $120,000, 5% of people will focus on creating a business which generates $500/month.  Some will succeed, some will fail.  However, the wisdom gained is always relative to the effort put in.

This post was reposted from http://finlit.biz/business/building-a-residual-income/, originally written on July 25th, 2013.