March.1.12Personal Finance
passive income
Money Matters with Nimi
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Chinedu often wondered how his colleague Bode who was on the same job level, with the same salary and who had similar skills and experience could afford to move to a better area, buy a decent car and even take his family off on holiday abroad whilst he (Chinedu) was still struggling to survive from month to month. Bode has been smart about using some of his salary to generate supplementary income. He has been saving since he started earning, and with the extra income he has generated, he is well on his way towards achieving financial independence and securing his family’s financial future.

What is passive income?

The salary you get from work is as a direct result of your efforts at work. Passive income, on the other hand, generally includes income that is not directly related to your daily activity and which you can generate without having to actively work for it; in fact it is the other way round, your money is actually working for you with no extra effort on your part apart from the act of investing.

Passive income in retirement

If you are middle aged, your goal should be to use as much of your income as possible from your remaining peak earning years to create a source of passive income, which is often the only source of funds for most people during retirement. It is particularly important to create sources of passive income that will generate regular income for you in retirement or should you be unable to work for a period of time.

Here are some of the most common sources of passive income.

Buy to let

You can buy a residential or commercial property for investment purposes and rent it out to create rental income. In Nigeria where rental income is earned often two to three years in advance, landlords have a huge opportunity to invest the windfall payment derived from one property to invest in another. This can be a great investment for the long term, but usually requires significant capital.

Dividend yielding stocks

One of the easiest ways to earn passive income is to buy shares in a publicly quoted company that regularly pays dividends to its shareholders. If you don’t have the time of the inclination to carefully select stocks yourself, contact a reputable stockbroker and educate yourself on the workings of the stockmarket. There is a plethora of information online, in books, magazines and the media on how to invest in stocks.  In the alternative you might prefer to purchase mutual funds as a good way to build a well diversified and professionally managed portfolio even if you don’t have enough money to buy individual stocks.

Both stocks and real estate have the ability to grow in value over time. Indeed, capital appreciation is one of the greatest benefits of both of these passive income sources when you sell your asset. These proceeds can then be used to create other assets.

In discussing the advantages of investing in these sources of passive income, one should never ignore the ensuing risk. Bear in mind that there is the very real risk of loss as markets can be volatile and prices can go up and down.

Interest Income

Interest is a most basic form of passive income. This recurring income stream can help finance some of your current needs, or be saved for other goals. Interest earned on savings account balance, fixed deposits, or bonds is a risk free source of passive income. However do note that with current interest rates hardy keeping apace with inflation, it will be difficult for you to grow your capital in this way.

Invest in a Business

There are many interesting business opportunities that struggle to attract adequate funding. If you are approached by a well regarded entrepreneur to lend money or invest in their business, and are interested in providing some support, have the proposal properly analyzed by a professional before you consider lending lend some of those needed funds or become a silent equity partner to the business entitled to dividends should the business meet expectations.

Try to envision the type of life that you want in the future. What do you want to spend your time doing? What type of house do you want to live in? It is important to ask yourself these questions. To many of us, as we enjoy one primary source of income from our jobs and occupations, we can become somewhat complacent. Yet it is very rare to find people achieving their financial goals and dreams from their salaries alone; one usually needs alternative sources of income to be able to increase one’s wealth in any significant way.

We all have a choice as to whether to spend today or save up to be able to consume more in future. It will not be easy and of course the state of your personal finances, family situation and lifestyle will determine how much you can afford to put away each month. The usual pulls on your income and the temptation to be lured by peer pressure to spend will continue. It is only through discipline and consistency that you can commit to saving something, no matter how small, each month. Through the power of compounding, even small savings today can grow into significant sums in a few years. Start building passive income today

 

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