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Passive Income: 5 Best Tips What is it and How to get it

Passive income

In the movie “My Boy,” Hugh Grant plays a rich, unemployed minion of fate. His father once wrote a popular Christmas song, for royalties from which the hero lives – receives passive income as an heir, not working. But not everyone is so lucky, so consider other options for passive income.

When you work and get paid – this is an active income. But if you suddenly lose your job for any reason – reduction, illness, did not agree with the boss in character – this income will be lost. Passive income is money that regularly comes to you regardless of your age, health, and performance.

Planning for passive income should be taken seriously, because it is created, as a rule, not in a month or even in a year. First, you need to decide: when exactly will you need additional income – in three, five or ten years. Determine how much money you need, how long and how often you want to receive payments: once a month until the end of your life, periodically – for example, once every five years, or according to some other schedule. 

Think about how you can put it off – from each salary little by little, once a year from the bonus or only once when you receive the inheritance. Timing and amounts, of course, must be realistic. Having decided on the plans, you can choose the most suitable tools.

What can be the sources of passive income?

Bank deposit

Bank deposit is a familiar way for everyone to create passive income. If you have not dealt with investments yet, you do not want to take risks, but you understand that it is unprofitable to keep money under the mattress due to inflation – open a deposit in the bank.

This is the simplest. You give the bank a certain amount of money for storage, and he pays interest for it. And you are guaranteed and regularly receive income. But in order to live only on interest, you have to invest a large amount of money.

Example

You decided to put money in one of the most reliable banks. Such banks usually do not pamper their customers with high interest rates. Most likely, the yield on the deposit will be slightly higher than inflation. We take the rate of 4% for calculation (this is the target inflation rate as calculated by the Bank of Russia). To monthly receive at the expense of interest on a deposit, say, 30 thousand rubles, the amount of the deposit should be about 9 million rubles. Agree, this is a decent amount that still needs to be accumulated.

Pros: stable income and reliability, because all deposits are insured. If the bank loses its license, you are guaranteed to receive your funds within 1.4 million rubles. If you want to put more, it is better to distribute the money among several banks.

Cons: the low yield on deposits, you need to freeze large amounts of money for a long time.

Private pension

If you want to have passive income not now, but in the future, when you retire, you have another option. You can conclude an agreement on supplementary pension provision with one of the non-state pension funds (NPFs).

You make regular contributions to NPFs, and the fund invests your funds to provide you with additional income. Ideally, this will help not only protect savings from inflation but also increase them several times over several years. When you reach the age specified in the contract, you will gradually receive these savings (your deductions plus investment income) in the form of a pension.

Example

30 years before your retirement, you started saving 5,000 rubles each month in private pension funds. Suppose a fund invests them with a yield of 9% per annum. Then you retire and expect to receive additional payments from non-state pension funds within 25 years. Your additional pension will be more than 30 thousand per month.

Pros: profitability can be quite high because non-state pension funds can invest in long-term and more profitable projects in the future.

Cons: such deductions do not fall into the deposit insurance system. If the fund goes bankrupt, there is no guarantee that you will return your savings.

Securities Investments

Passive income

Investing in the stock market may well become a form of passive earnings. The main law of investment: profitability is proportional to risk, profitability is growing – the risk is growing. Therefore, it is better to start with the least risky and most predictable instruments – bonds, preferred shares or shares of investment funds with a high credit rating. More risky tools – not for beginners. Let’s take a closer look at the pros and cons of individual investment instruments.

Coupon bonds

Bonds are debt securities issued by the issuer – the state or company that plans to raise money. By purchasing a bond, you lend to the issuer your savings for a specified period. In return, he promises you a well-known income. You can receive this income at the very end of the bond validity period – at the time of its redemption, or you can also receive the so-called coupon income – periodic payments. It is better for novice investors to choose government bonds or coupon bonds of reliable companies.

Example

The Ministry of Finance offers special federal loan bonds for private investors – OFZ-n. Here are the parameters of one of the 2018 issues: face value – 1000 rubles, bond term – 3 years. Payment of coupon income – once every six months. Amounts of payments – from 32 to 42 rubles. In just three years, about 220 rubles will be paid. The total yield is 7.3% per annum. This is higher than the deposits of most banks. And if you take advantage of tax incentives, net profitability will be even higher.

Pros: low risk, and minimal government bonds.

Cons: yield on reliable bonds is small, not much higher than interest on the deposit. At the same time, it is impossible to completely eliminate the risk of loss of funds – any investments suggest it. Even very reliable companies may find themselves in a difficult financial situation and fail to fulfill obligations to bondholders. Investments in the stock market do not fall into the deposit insurance system.

Preference shares

Ordinary shares do not guarantee income to their owners. And on preferred shares, dividends are usually known in advance. This is a more predictable option that is better suited for beginner investors. If you are just starting work in the stock market, you should buy only “blue chips” – securities of the most reliable companies. Shares of other organizations may be more profitable, but they are accompanied by more serious risks.

Pros: the opportunity to get more income than on bank deposits and bonds.

Cons: a more risky tool, suitable only for experienced investors.

Units of investment funds

Mutual investment funds  (UIFs) form ready-made portfolios of securities – only bonds, only shares or various securities. And you can buy a piece of such a portfolio – a unit investment fund. This is also a good option for a newcomer to the securities market: you can study the investment declarations of various funds and choose the appropriate one.

Unit investment funds are managed by special management companies (UK). And it is important to trust your savings only to companies with the highest reliability rating – in which there is at least one letter “A”. So you riskless. You can choose suitable management companies on the sites of credit rating agencies. Then professionals will manage your investments, and you will receive passive income.

Pros: you can start investing in mutual funds from almost any amount, at least from 1000 rubles, and the profit can significantly exceed the interest on a bank deposit.

Cons: traditional for investments – investments are not insured by the state, profitability is not guaranteed. And do not forget that income from securities is subject to income tax.

Investment Life Insurance (ILI)

In this case, the insurance company will invest the money for you. You conclude an agreement with her for 3-5 years, once or several times during this time you deposit money, and at the end of the term, you receive back your contributions plus accumulated investment income.

Almost all companies guarantee that the full amount of the contributions will be returned to you in any case, even if the investment is unsuccessful and the insurer receives not a profit, but a loss. Sometimes the protection of deductions is not full, but partial – you need to carefully read the contract.

As a rule, an insurance company can offer you several investment strategies. There are less risky ones – the insurer will invest your money in the most reliable assets, for example, in the same bonds. But the yield, in this case, will below. There are more risky ones – the company will be able to invest your money also in stocks, including foreign companies. Possible returns will be higher, but the likelihood of not earning anything will also increase.

In addition to this, ILI policies often include life insurance against various risks. In the event of a sudden serious illness, injury or death, the policyholder himself or his heirs will receive not only the full amount of the contributions made and investment income but also a large insurance payment.

Pros: professionals manage your money, so income can be decent – higher than on bank deposits. In a bad situation, you just get back the money you contributed. If the policy includes risky life insurance, your family will receive additional protection. Another bonus of endowment insurance is the ability to receive a tax deduction.

Cons: profitability cannot be predicted in advance, it may turn out to be zero. The state does not guarantee the safety of insurance premiums. So you need to choose an insurance company very carefully. 

What else can bring passive income?

Property

The property

To rent an apartment, or rather several, to collect money from tenants and not go to work – sounds like a dream. But in fact, this income is also accompanied by costs and risks. It is necessary to take into account the costs: rent, real estate tax, rental tax. It is advisable to take out apartment insurance in case of fire, flood and other troubles. If the area is not very prestigious or there are many offers for renting apartments, finding suitable tenants can be difficult. In addition, tenants may not pay on time or spoil your property – and it is good if the insurance covers repairs.

Pros: The ability to get good passive income. Unlike securities, real estate can rarely depreciate to zero – only in the case of some global cataclysms, but there is insurance for this.

Cons: expenses for the purchase and repair, taxes and utility bills can significantly reduce possible income.

Crowdfunding

Not everyone can create and run their own business. But you can invest in other people’s projects in order to earn. For example, crowdfunding can make investments in startups and fast-growing companies. They can “shoot” and bring huge income. True, they can burn out along with the money of investors. Do not invest all your savings in such projects. But if you have already created yourself several other, more reliable options for passive income, then a small part of free money can be invested in this way.

Pros: the ability to make substantial profits.

Cons: very high risks. Such tools are more suitable for professional investors who are versed in the market where they plan to invest and are willing to risk money.

Intellectual property creation

Creating a hit, a bestseller, a blockbuster, or patenting an ingenious device for opening packages with milk is a great way to start generating passive income. You can receive royalties for your work or invention for the rest of your life. Grandchildren will also get it. Of course, in order to live on royalties, you need to create something very popular and correctly register the rights to your invention. It’s worth a try – the sooner you start, the more chances you can arrange for yourself and your children to live like the hero of a movie with Hugh Grant.

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