As passive as it may sound, ‘Passive’ income is the money you make with little or no effort. It is like making an initial effort to open a tap for water and the water (money in this case) keeps flowing by itself. You may put in extra effort and ‘unscrew’ the money tap further to increase the cash flow from time to time. You will get passive income ideas in this section, which will help you start earning money while remaining in the hibernation phase. And we will let you in on secrets to successful passive investing.
In simplest terms, a passive income is generated when you know how much money to invest and where to invest. Continuing with our ‘tap’ example, it means to know which tap to open and by how much. You definitely want to open the faucet that fills up your swimming pool so that you can take a swim in it anytime you want. You definitely do not want to open the tap of your washroom sink, water from which will go immediately go into the drain if not used properly.
What are Passive income investments?
As people in Financial markets put it, passive income investments are the ones that involve the investor only once (at the initial stage) and do not require monitoring or adjustments over their lifetime. These investments work towards earning income on their own.
As marketers put it - you work hard to earn money. Passive investment is your money working hard for you. ‘Money attracts money’ is the most definitive statement here. You should not be indolent enough to put money in some interest-earning bank product and call yourself a passive income earner.
Types of passive income businesses
These can be divided into four types by calibrating the Risk against the Return potential of the investment.
Real Estate
It is ancient wisdom that real estate will continue to give returns by itself over more extended periods. This wisdom still holds true today. However, it does not mean that you need to buy property to earn a return. The regular maintenance and upkeep required in the physical property will not classify it as a passive investment.
You need to put your money into a Real Estate Fund managed by a REIT (Real Estate Investment Trust). REIT buys properties, manages them for rental income, or may simply buy at a low price to sell it off after holding for a period. But as a passive investor, you don’t need to worry about all that.
Dividend funds or stocks
Do your research once and buy stocks of a good-standing publicly traded company. Now, as an owner of the company, you will receive a portion of their profits regularly. Suppose you do not want to spend time tracking your portfolios all the time or do not know how to do research on companies. In that case, you can have an easier time investing in Mutual Funds.
Index Funds
Index Funds are a type of Mutual Fund that tries to emulate the portfolio according to the stocks that a market index has. As the index goes up, so does your Index Fund. As the fund does not churn the portfolio much, you also save on capital gains tax.
Peer lending
Suppose you physically lend money to a borrower. In that case, you will have issues like regular follow-ups and worry about your capital at risk. The worries can easily be outsourced, or rather crowd-sourced. This is done through an online platform where various individual lenders collaborate and give out loans. Once you commit an amount of money you wish to invest, there is nothing left to do.
The Secret
The secret of success in passive investing is setting clear goals. And at the same time avoiding the following pitfalls:
- Emotions – never invest with an emotional mindset
- Avoid investment Fads – there are several investment options, and more of them keep coming up every day. As you are investing for the long term, avoid speculative trends
- Dividend investing with a perspective in mind
- Do not follow fake investment gurus
- Do not invest in something because your friend invested
- You are investing for long-term returns, not playing games
Build a passive income legacy your children will thank you for, and friends and family would talk about even when you are not there. Do keep in mind that the ‘millionaires next door’ became millionaires because they liked to study and stayed on top of their investments. The trick to passive income business is to learn to do this without turning it into another full-time job. Are you already an investor? Did you enjoy reading and feel the need for more information? Follow the links below, and let’s continue our discussion.
