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Passive income, as its name suggests, means earning income without a lot of effort.
“Count me in!” did I hear you say?
Let’s look at a few ways you can set yourself up for a passive income stream.
By Julie Nipperess
The simple fact of the matter is that most of us wouldn’t mind a few more dollars coming into our bank accounts on a regular basis. And passive income is one way you can achieve that.
While I’m not suggesting that you give up your day job just yet, if you choose your passive income source wisely, you will be able to establish a reasonable regular income for many years to come, while minimising your risk, too.
Unlike your day job, which is tied to regular earnings, and therefore called an ‘active’ income stream (because it requires that you put in time and effort), a passive income is something that you take the time to set up and then reap the benefits from.
For example, renting out a spare room, receiving royalties from a book you wrote – these are both forms of passive income, because you’re not actually ‘actively’ working for them all the time.
Your superannuation too (even though you can’t access it until you are near retirement age) earns passive income.
One good reason to establish passive income is precisely because it’s not connected to your time and effort. You can earn money from your passive income even while you’re at your day job, or while you’re on holiday, if you do it right.
Passive income can also offer financial security. Although you might take a risk when you’re first establishing the passive income source, it will eventually provide an extra money – for anything you desire: trips overseas or a few lifestyle splurges. It can prop you up too, in circumstances where you lose your main source of income (your job) or if you face unplanned expenses.
While there are lots of ideas for establishing passive income, one of the best and most common ways you can do this is through investment. One of my clients was just 16 when she started her first managed fund and would crow to anyone who listened: “I make money in my sleep!” This is what you’re aiming for, too!
This is the basic idea of a ‘passive income’. If you have the right strategy in place, you just need keep an eye on it, and tinker with it from time to time to make sure you’re getting the best results.
Of course, you can go it alone, but help from a professional financial planner is always recommended, because a planner will help you to assess your appetite for financial risk, as well as devise an investment strategy designed to achieve your personal earning and savings goals.
Always research your options. You might opt for a share portfolio or a managed fund, or even an investment property, but talking it over with a money coach or financial planner who knows the market, has a good understanding of the tax implications and who can actually get you started, is a worthwhile use of your time.
Be prepared for your passive income to take a little time to gestate before it starts providing you with regular returns. It’s important to remember that investments are cyclical and returns fluctuate with the ups and downs of the market. But again, with the right diversification in place, you can minimise your risk and aim to maximise your returns.
Also remember that financial planner or money coach has access to a lot of information that won’t be at your fingertips. Generally, when a company’s latest news hits the media, it’s too late to maximise your position. But a planner will keep an eye on your investments and, in many cases, do this for you based on information they get daily from a variety of sources.
Your job is to simply sit back and relax, check your statements, and revise any arrangements as needed, or at your annual review. Of course, you can always have a higher level of involvement if you want to.
Similarly, if the suburb you bought in suddenly takes a price dip, it’s worthwhile just working through why with your planner, and figuring out what to do next. Never underestimate the benefit of having some experience and knowledge on your side.
With the banks currently offering only around 2% interest on savings accounts, it’s a great time to consider whether or not any funds you have lying around in your account could be put to better use.
And because borrowing rates are presently so low, too, it’s also an opportune time to consider borrowing to invest. This is riskier than using your own cash, but it’s a strategy that might help you to get a small managed fund. You need about $2,000.
The other benefit of a managed fund or share portfolio, and even property, is that it grows in value over time. A managed fund lets you have easy access to your money when you need it, too – this is not necessarily as easy with property and shares, because for both, often you need to find a buyer before you can get to your cash.
Property, of course, will enable you to build up equity over time which you can use, or use as collateral if you need to borrow more money.
There are pros and cons with every scenario, so get professional advice. And remember the sooner you get started, the sooner you’ll start earning.
If we can help, talk to us.
This is general advice and should not be treated as personal advice. Julie Nipperess is an authorised representative of Step Up Financial Group Pty Ltd ASFL No: 512509.