Do You Have a Passive Income Strategy?
Here’s what you need to know to create a passive income strategy that works for you.
If you want to retire early, you’ve probably looked into ways to build passive income. And that makes sense – generating passive income can be a great way to add income streams that can ultimately grow your long-term wealth.
But building a passive income strategy takes effort, planning, and often, capital. That’s right: to make money with passive income, you need money.
Let’s dive into what it takes to build a passive income strategy.
But first, what is passive income?
You might be familiar with the concept of active income, which is the money you earn from working a job. On the contrary, passive income is money you earn with little to no daily effort. You can think of passive income as money you can generate even while you sleep!
Earning passive income means more than just having more money in your wallet. It also diversifies how you make money, meaning you don’t have to rely on one income source if your job falls through. Passive income can also help you work towards financial freedom, invest in business opportunities, or give financial support to family and friends.
What do you need to know before creating your passive income strategy?
The two resources you need to create passive income are time and money. Your decision will likely come down to a tradeoff between the two.
Start by asking yourself these questions:
How much money can you put towards your passive income strategy?
One way to create passive income is to make your money work for you through investing. But first, you’ll need to make sure you’ve got enough cash for your immediate needs and emergency fund. Make sure you have at least three to six months worth of savings before committing any capital to your passive income strategy.
Then, assuming your safety net and finances are in order, determine how much money you have to put towards generating even more money. You shouldn’t touch the money you put down here, because it will get tied up in investments, such as property or financial markets, that require staying power to generate any meaningful returns.
Understanding how much you can put down can help to manage your own expectations about how much you can actually earn with your passive income strategy (spoiler alert: you’re not going to earn millions from a $10,000 investment). It can also guide you in what you can realistically invest in.
Renting out a property or investing to earn dividends are two common passive income strategies, but these require significant upfront financial investments. A standard income portfolio pays a dividend of 4% p.a. So, if you want to generate $40,000 HKD in dividends, you’ll need to start with a portfolio of $1,000,000 HKD. Most of us probably can’t put up $1,000,000 HKD, so maybe instead we invest $100,000 HKD, understanding that that will generate $4,000 HKD a year instead.
How much time can you put towards setting up the passive income stream?
Some passive income streams require more time to set up and maintain than others. You can spend months or even years writing a book to generate royalties later, or you can invest money one time (or more, if you’d like) into an income portfolio that generates yields and dividends. It’s important to know if you are willing to put forth a lot of effort now and very little later, or if you’re comfortable being responsible for that rental property.
Your passive income strategy should work for you
No single passive income option is categorically better than another. On top of deciding between passive income strategies, you should also consider how you like to spend your time, because it’s just as important as how you earn your money.
Generating income is about generating financial and emotional value throughout your life. There are a bunch of get-rich-quick schemes out there that make false promises of little effort to make money. Avoid those. Making money takes effort. If it were easy, everyone would be doing it.
So, put aside some time to plan how you can give yourself and your loved ones multiple income sources through passive income. Passive income ultimately gives you more options and flexibility. And it’s a faster way to achieving your financial goals.
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