Passive Income – The Alternate Wealth-Building Strategy

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By Licensed Adviser

 

‘If I had that much money I would’ve taken that vacation.’

‘If I had Rs 200,000/- coming in every month, I could retire.’

‘If I had more time I would’ve done a zillion things I want to do’. 

Are you familiar with these thoughts in your head? You’re not alone. So how do we get down to addressing them?

A passive income is the key to achieve financial independence. Passive income is the income that is received automatically with minimal effort, unlike active income which is entirely based on the time we work. In short, it is the income where you get paid again and again for the time and effort you have invested once. People who have realised the power of passive income generate money through various streams by cleverly detaching their physical time from the money they make.

Why do you need passive income?

  • Freedom from time: If the 9-to-6 job is sucking the life out of you, then this is your path to salvation. Once, you have put in that initial time and effort and you start realising the results, this income becomes totally independent of time.
  • Freedom from stress: When you’re no longer living from paycheck-to-paycheck, you’re no longer bonded by work-related stress. 
  • Freedom to do what you love: When it comes to the job that wins you the bread, most people don’t do the job they love. But, passive income from what inspires you and what you’re passionate about and also want to make some cash from it. 
  • Freedom to be independent of place: With the passive income flowing in on its own, you don’t need to be pinned down to any ‘place of work’ so to speak.
  • Freedom to focus on building your new business without worry: A passive income is something that many new business owners aspire to achieve. It is a regular form of income that generates on its own by investing only minimal time and effort. This will give you time to focus on other areas of your business without worrying about meeting monthly expenses.

How do we create the funnel?

Now here’s the catch! Setting up this funnel does require time, effort and some initial capital. During this phase, you receive no income. You’re investing your time in order to funnel that income in due course.

There are various ways to generate passive income such as real estate rentals (commercial spaces or even Airbnb), dividends, interest income, royalties, franchise fees, blogs, e-books, online courses, video tutorials, selling art online and so on. However, the option you select should be based on two metrics – time and money. We will discuss a few here which we can help you with:

Income from Dividends: Shareholders of stocks receive dividends in the form of cash in their bank account. High dividend-paying stocks is a good choice for those wanting to make a living with passive income, since there will be payouts each quarter or so. Blue-chip companies offer more dividend stocks. Research the financial standing and past performance of the company (last 15 – 20 years) to ensure desired dividend income in the long run. Taking financial advice on top dividend stock picks will always help. To receive dividend income, you can also invest in mutual Funds, Exchange-Traded Funds (ETFs) apart from stocks.

Income from Private Equity Investing: Private equity investments refer to investing in equity or credit hedge funds, real estate funds, and private company funds. There will usually be 6 month – 3 year lock-in periods. If you invest in private company fund as a venture capitalist, you might not be able to get your money out for 5-10 years, depending on the success of the company. The risk and return here largely depends on your investing acumen, research-based judgment and access.

Income from Peer to Peer (P2P) Lending Sites: With banks and lending institutions being strict about the credit score, borrowers who are finding it difficult to get loans approved are resorting to these P2P lending platforms. They provide loan facilitation services from their platform. In fact, it is the technology layer that connects the lenders and the borrowers. They are treated as non-banking financial companies (NBFCs) and is recognised by the RBI. With access to credit records of borrowers from the credit bureaus, lenders can make informed lending decisions. However, being in its nascent stages in India it is advisable to wait for further guidelines for the sector from RBI. If you are tempted to invest there, we suggest you invest a very small portion of your investments or wealth in P2P lending.

Income from Rents: Real estate investment is a risky affair though it provides high returns. You can generate income by renting out the property you own. Generally rental yields are higher for commercial properties as compared to residential ones. But you need larger capital to buy a commercial property than residential ones thereby making the latter the favorite one. This however, this needs some amount of capital accumulation and time before you can reap the benefits.

Real estate crowdfunding is also an interesting option to watch out for in the near future.  Through crowd-investing you can invest in a property development project, at very low prices in its early stages. You can exit the investment 1 to 3 years later as required gaining on the appreciated value of the property. Exiting the crowdfunded investment involves reselling the property which the investment firm takes care of in most cases.

You can add streams of passive income from various sources just so that you don’t put all your eggs in one basket. Depending on what is working well for you, you can improvise on it and re-invest further as you go slowly building your own wealth-generating funnel. Even though these are ‘passive’ forms of making money, they do require your initial attention, research, and effort.

In essence

While you’re on your journey to create the passive income streams, keep the following in mind:

  • Get Out of Debt: The less money you’re paying in interest to creditors, the more money you have in your pocket each month.
  • Avoid ‘get rich quick’ schemes: When you’re offered a chance to earn lots of money without risk, it smells trouble. Stay out of it. 
  • Avoid any direct investments in technology: If you don’t understand them fully or if you don’t have a high-risk tolerance it is better not to make direct investments. It is not easy to predict what will click.

While passive income is not a get-rich-quick scheme and might not be the answer to all your financial problems, it is the seedling you’re planting from which you can reap benefits in future. Retirement in the true sense is achieved only when you don’t have to work to earn a living, but instead can count on reliable sources of passive income.

Investment guru Warren Buffet sums it up as, “If you don’t find a way to make money while you sleep, you will work until you die.”

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