4 Ways to Generate Passive Income
This is a collaborative post
To paraphrase famous American financier Warren Buffet, if your money doesn’t work for you while you sleep, you will work until you die. It is difficult to maximize a lifetime’s work earnings to pay current and ongoing living expenses, save for emergencies, and fund a comfortable retirement. In order to achieve these financial goals, you must invest and make your money work for you, generating passive income.
This article sets forth, in order of achievement, the steps to take to maximize the money you earn and the money you save.
1. Pay Off High-Interest Credit Cards
How is paying off credit cards generating passive income for you? It will save you a lot of money in interest that they charge over time, and you can consider those savings “passive income.”
While low-interest-rate credit cards can carry as little as 4.9 percent interest, most credit cards charge 20 percent or more in interest. This means that while charging purchases is convenient; it becomes very expensive if you take time to pay it off.
Let’s use an example: let’s say you had an emergency expenditure in the amount of £500. You have enough income to pay £25 a month on that debt. At that rate, it will take 25 months – over two years – to pay off that debt, and when it is paid off, you will have paid £125 in interest.
£125 is a lot of money to waste. You think about it, and if you scrimp, you can afford to pay £50 a month towards that debt. In that case, it will take only a year to pay off the debt; however, you still will have paid £100 in interest.
You can see that it is imperative to pay off your high-interest rate credit cards as soon as you can in order to save the money you would have paid in interest on the balance.
2. Fully Fund Your Emergency Savings
You might think, next, “well, I have a credit card for emergencies. If I am going to pay it down and avoid using it unless I can pay it off in full immediately, what do I do in case of an emergency?”
You need to have an emergency savings account and money that you can readily access if an unexpected expense occurs. Conventional wisdom dictates that you have six months to a year worth of living expenses in ready cash. While it might take some time to accrue that amount, having that money in hand rather than having to borrow it will not only save you money in interest – it will earn you money.
Here’s how. Let’s say you started your emergency savings by putting aside that £50 per month you have in disposable income. After ten months, you have £500 plus £6.50 in interest at .5%. Not much interest earned, granted, but better than paying the credit card company interest at all! If you had that £500 in your savings account when the emergency expenditure arose, you would have simply paid it in cash and started building up your emergency savings again instead of charging it and paying £100 to your credit card lender.
See how interest adds up, for the worse and for the better? Pay off your credit cards and fully fund your emergency savings before considering any other type of investment, to avoid throwing money away in interest.
3. Maximize Your Pension Contributions
After you’ve paid your credit cards off and you’ve funded your emergency savings, look to your employer’s pension scheme. Why? Because let’s face it, the Basic State Pension, currently £137.60 as of this writing (July 2021), is insufficient to support you in retirement. You will have to supplement the Basic State Pension with savings on your own.
Your employer will offer a pension plan and a matching contribution, depending upon the type of work you do and the type of company you work for. You should contribute at least the amount you must contribute to get the maximum employer contribution to your account.
Why? Because if you do not, you are turning down free money. And, this money is being invested for you and is making money on its own while you work to earn more money. Upon retirement, most people do not pay tax on withdrawals from their pension because their total annual income is less than their personal allowance.
4. Invest Disposable Income
Now that you have paid off your credit cards, you have money in emergency savings, and you have maximized your contribution to your employer’s pension scheme, you can consider investing it on your own if you have disposable income left over.
If you are interested in learning how to invest in the stock market, multiple online platforms offer investor education, often with a very low minimum initial investment. If you are more hands-off, you can rely on a robo-advisor on one of these platforms to invest for you based upon the criteria and risk tolerance that you specify.
If you are interested in commercial real estate investing, consider investing in investment funds such as unit trusts, Oeics, or investment trusts. These funds may directly own commercial properties and pay investors returns based on their growth in value, rental income, and/or management fees earned. These funds may buy shares in property-related companies, paying investors dividends based on the growth in the value of the shares.
In the UK, investors usually only need around £500 to invest in a commercial property fund or £50 per month for regular savings.
Why is commercial property a sound investment in the UK? In the UK, commercial tenants are subject to longer lease terms compared with Europe and the US, making the income stream from rent more stable and predictable. Commercial property leases are also much longer than residential leases, typically 10 to 15 years.
Hopefully, this article will get you started towards making your money work for you and earning passive income. Good luck!
About the Author
Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.