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How to Get Passive Income. #1 Step-by-step Instruction

How to Get Passive Income?

How to Get Passive Income? Probably, there is no person in the world who would not want to have a source of income that does not depend on the business or the employer. If you want – work, if you don’t want – you can take a timeout, anyway, there will be money for a living. Independent financial adviser Natalya Smirnova told how this can be reached.

How to Get Passive Income. #1 Step-by-step Instruction

1. Determine how much money you need to be happy

So, first, you need to understand what level of passive income you need. For example, 50 thousand ₽ per month. This is 600 thousand a year. So, you need to accumulate capital, which would bring you such an annual profit. At the same time, all profits cannot be withdrawn, otherwise, your capital will be mercilessly eaten by inflation.

So you can only shoot the increase that exceeds the price increase. Say, if inflation in the country is 5%, and your portfolio has grown over the year by 10%, then you can withdraw for consumption only 5%. And the other 5% needs to be reinvested in order to preserve the purchasing power of savings. What inflation to lay for rubles and currency? For rubles – at least 4%, for currency – at least 2%.

How to Get Passive Income. #1 Step-by-step Instruction

How to Get Passive Income?

Next, we determine what risks you are ready for. By default, passive income is not created in too risky instruments, otherwise, you will have income in one year, and in the next 2 – 3 there may not be profitable due to the crisis. Therefore, for passive income, they mainly use a moderately conservative (expected return in dollars no higher than 5%, in rubles no higher than 10 – 11%) or a moderate portfolio (expected return in dollars no higher than 7 – 9%, in rubles no higher than 11 – 15 %).

So, if you are a conservative, then you can withdraw about 3% a year from the dollar portfolio, not more than 6 – 7% from the ruble portfolio, and if the moderate investor – from about 5 – 6% from the dollar, and 7 – 11% from the ruble. It turns out that if you need a ruble income of 50 thousand a month or 600 thousand a year, then a conservative will need a capital of 20 million ₽, and for a moderate investor – about 5.5 – 8.5 million.

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How to Get Passive Income. #1 Step-by-step Instruction

2. Choose tools

The goal with capital is clear, it remains to understand where to save. I know little of people who are willing to invest for 20 years or more, not being able to take advantage of the results of their work. Usually for an investor, even if he embarks on the path of a renter with an initial capital of 300 – 500 thousand ₽, it is important to get some regular income here and now and just reinvest it if you do not need it yet. So, what tools to include for this in the portfolio?

Creating a portfolio for passive income is better than the most understandable and transparent tools. They are represented by three classes of assets: bonds, real estate, and stocks. Each of them with regular payments, available for replenishment and easy to manage.

How to Get Passive Income. #1 Step-by-step Instruction

Block 1: the first part of the portfolio – conservative, liquid bonds

Minimum entry: 1000 ₽ and $ 1000 to buy 1 bond, but you need to look at the required minimum to open a brokerage account with your chosen broker. As a rule, this threshold is not higher than 30 000 ₽, but it also happens below 10 000. 

This block consists of bonds of the most reliable companies, with a fixed coupon, not too long maturity – no more than 10 years (long bonds are more volatile in price).

How to Get Passive Income. #1 Step-by-step Instruction

If you’re a moderate investor, then 10 – 15% of this part can take high-yield bonds. This paper is not the largest and most reliable company. The yield on it can be 3 – 4% or higher than the bonds of the largest companies for the same period, but the risks are higher for such bonds.

I prefer to take bonds directly rather than through bond funds (ETFs), because bond coupons have preferential taxation.

Coupons on ruble-denominated corporate bonds of 2017 and beyond are taxed only at an excess of the key rate plus 5% (that is, practically non-taxed), and on state or municipal securities are not taxed at all.

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On funds, all growth is subject to tax. An investor can receive a tax benefit only if he holds the paper for 3 years or buys it on a Type B IIS. But in this case, for three years he will not be able to access passive income from this part of his portfolio. Plus, the fund has no fixed regular payments, a clear repayment date, so it’s difficult to plan income on it.

You can choose your own bonds in the Russian market, for example, at  investfunds.ru .

How to Get Passive Income. #1 Step-by-step Instruction

Block 2: the second part of the portfolio – rental property

How to Get Passive Income. #1 Step-by-step Instruction. Minimum entry: depends on the selected closed-end investment fund, from an average of 300,000 ₽; for foreign REITs, an entry can be below $ 100. Again, the entry threshold for opening a brokerage account depends on the broker; abroad, it often ranges from $ 10,000. 

Buying an apartment or office requires substantial capital as well as management, so I prefer to invest in real estate through real estate funds. In the Russian market, these are real estate investment funds, for example,  Active. CIFs may also be available to unskilled investors with a low entry threshold.

How to Get Passive Income. #1 Step-by-step Instruction

Abroad, these are REITs (real estate investment trusts, they come in the form of exchange-traded funds and are accessible through a brokerage account), for example, funds of Vanguard, iShares and so on.

But there are no exchange-traded real estate funds on the Russian market, and foreign funds are available only to qualified investors if taken through a Russian broker.

If you buy shares through a foreign broker, then the investor will have to independently report on them on a yearly basis to the tax, file a declaration on his own, calculate and pay taxes.

So for beginners and investors with the capital of up to 6 million ₽, I would recommend starting with Russian real estate investment mutual funds, but only with those who make regular rental income payments to their investors. It is such closed-end investment trusts that are suitable for passive income.

How to Get Passive Income. #1 Step-by-step Instruction

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Block 3: the third part of the portfolio – dividend aristocrats

How to Get Passive Income. #1 Step-by-step Instruction. Minimum entry: stock can be bought for less than 100 ₽, it all depends on the selected paper. You need to focus on the minimum amount to open an account with your chosen broker. As a rule, this threshold is not higher than 30 000 ₽, but it also happens below 10 000. 

These are the shares of the largest companies that pay stable dividends to their investors from year to year, providing them with profit from the dividends themselves and the potential increase in the price of their securities.

You can form a portfolio of Russian dividend aristocrats and foreign ones (through buying them on the St. Petersburg stock exchange), since there are practically no stock funds with dividend payments on the Russian market.

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Examples of Russian dividend aristocrats: Surgutneftegas, Gazprom, MTS, etc., among foreigners  AT&T, Wells Fargo, McDonald’s, etc.

It is advisable to choose the shares of companies in various industries, not more than 15% of the funds from this part of the portfolio to one company.

How to Get Passive Income. #1 Step-by-step Instruction

3. We distribute the money among portfolios

If we talk about the distribution of funds between the three instruments, then we need to focus on risk preparedness. Ready for risk – the share of block 3 in the portfolio can be brought up to 30 – 40%, but not ready  no more than 10 – 15%. I prefer to split the shares in blocks 1 and 2 equally.

If we talk about the ruble / dollar split, then for beginners, I assume 50/50 ruble and dollar in blocks 1 and 3.

Of course, there are other tools with regular payments, such as structured products, investment life insurance, but they are quite complicated. Plus, they rarely allow you to make regular contributions to them, so I advise them for more advanced investors.

The opinion of the authors of the columns may not coincide with the opinion of the editors of the site. The user makes all decisions on the use of any financial instruments at his own risk.

How to Get Passive Income. #1 Step-by-step Instruction

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