“If you don't find a way to make money while you sleep, you will work until you die.”
While Warren Buffett might have expressed it a little too extremely, there might still be some truth behind this perspective.
Slightly more than a decade ago, buying a plate of chicken rice for lunch cost an average of $2 in Singapore. Today, the price of that same plate has increased by a whopping 75%, costing an average of $3.50.
Singapore's core inflation (which excludes accommodation and private transport costs) rose further to 4.8% in July 2022, surpassing economists' forecasts and hitting its fastest pace in more than 13 years. This was contributed by stronger increases in the prices of food, electricity, and gas.
At the same time, everyone is facing a double whammy as real wage growth has been dampened by higher inflation, coming in at 1.6% in 2021, less than half of the 3.3% recorded in 2019. That will make it even more difficult for people to keep up with the consumer price increases.
As costs continue to rise, it’s no surprise that more individuals are looking for ways to passively generate additional income on top of their salaries to fulfill their financial goals.
In this article, we look at how passive income can benefit you, and also explore ways to generate more passive income.
What is passive income?
Passive income refers to the sources of income that are generated with almost no additional effort. This is in contrast to active income, where you earn a salary as part of your day job or from completing assigned tasks.
Here is also where some confusion typically sets in. Spending time and effort every week producing content for a video you monetise on YouTube or writing articles on a blog are regarded more as side hustles and do not necessarily count as “passive” ways of earning income.
Similarly, it also excludes income earned from active traders who spend time to engage in more active forms of investing, as that requires a significant amount of effort on their part as well.
For simplicity, passive income here is associated with those commonly in the domain of investing.
Learn more about the differences between active and passive investing here.
Why is passive income important?
In addition to being a method to beat inflation, earning passive income also has many benefits associated to it, such as:
Improved financial stability
Many of us have seen how the Covid-19 pandemic upended the global economy, causing many workplaces to shut down. Millions of people lost their jobs and did not anticipate that its effects would last this long.
Having another source of passive income can help you weather financial storms and provide better financial stability as you can still be covered financially even if you were to lose an active income stream.
Freedom of time and flexibility
Earning passive income could also potentially help you take the stress off being dependent on a single source of income.
By having additional ways to strengthen your financial stability, this frees up your time, allowing you to optimise other aspects of your personal finances such as your taxes.
Strengthened retirement goals
Who wouldn’t want to retire early? We’ve all heard about the FIRE movement, and if you are someone actively working to retire at a younger age, passive income can be a great way to supplement your income to accelerate your retirement goals. This is because there will generally be a limit to how quickly you can earn from your day job.
Some ways to earn passive income from investing in Singapore
Many people are often wary when it comes to investing their hard-earned money, but there are thankfully many different ways for even the novice investor to earn passive income.
While some sources might require a higher degree of due diligence, there are other more guided and accessible ways to do so.
Introduced back in 2009, CPF Lifelong Income For the Elderly (CPF LIFE) is a comprehensive passive income instrument that provides Singaporeans with a monthly payout for their lifetime. The monthly payout amounts depend on a number of situations, and it is important to understand how best to prepare for your passive income needs for retirement.
With a wide variety of income-generating portfolios available, robo-advisors are a popular approach to passive investing as they require minimal human intervention. All you need to do is deposit your money, set your investment goals, select your risk tolerance, determine your investible savings, and let the robo-advisor provide you with the optimal solution.
That said, not all robo-advisors are created the same. Click here to understand the differences and learn how to decide which digital wealth platform is best suited for your needs.
Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) or index funds typically track a particular market index such as the S&P 500 or the Dow Jones Industrial Average. These funds mirror the performance of the index, and are also a great way to passively invest in the stock market. Furthermore, ETFs tend to pay dividends on a regular basis.
A unit trust (or mutual fund, as they are known in the US) is a type of financial vehicle in which money is collected by the fund manager from many investors to invest in securities like stock, bonds, and other assets. Unit trusts are often bought and sold through financial advisers and online fund platforms.
Unit trusts are also an alternative to ETFs for Singapore-based passive income investors.
Real estate investment trusts (REITs)
REITs are trust structures that hold various real estate investments and property assets. When investing in a Reit, you are essentially investing in the properties managed under them and become a partial owner of the properties that the Reit manages.
Reits have to distribute at least 90% of their taxable income every year, making them an attractive source of passive income in Singapore.
A dividend is a payment of cash or stock to the shareholders of a company. When public companies generate profits, a portion of those earnings will be funnelled back to investors via dividends. These dividend payments are usually paid several times a year or when the company’s board of directors agree to pay dividends.
Wondering whether Reits or stocks will better suit your investment needs? Read about the differences between the asset classes here.
What makes a good passive investment strategy?
As everyone’s financial situation is unique, it is important to understand that individuals at different stages of life will have different financial priorities.
For example, those approaching their golden years will have retirement on their minds and prioritise more stable payouts, while a younger investor with a longer time horizon might pursue more aggressive growth opportunities.
Nevertheless, there are several key things to look out for when deciding on a passive investment strategy:
- Capital Appreciation — The value of your passive income instruments should have the ability to grow over the long term. While an instrument might be able to generate passive income for you, it might also depreciate in value over time, leading to undesirable outcomes in the long run.
- Ability to overcome inflation risk — Inflation is one of the primary risks for income investors. Although some passive investments promise a fixed stream of payments, they also likely remain at a fixed dollar amount, even if inflation rises. Additionally, inflation diminishes the real value of your investments’ principal. These factors create the risk of losing value on your investment, even as you collect payments and receive your principal back at maturity. Investing in inflation-linked investments can help to mitigate this.
- Diversified sources of income — To limit exposure to a specific asset type, you should always seek to diversify and spread your eggs across different baskets. For example, unit trusts are diversified investments into multiple companies, which help to lower volatility and investment risks. Passive income goes beyond these common examples, and it is important to stay diversified to prevent overlooking any opportunities.
For an overview on income investing and its risks and benefits, click here.
Most importantly, before making any investment decisions, you need to plan ahead and do your own due diligence. For example, if you plan on building a dividend stock portfolio, do ensure that you conduct research on the company’s overall financial health and their plans for dividend payments.
Earning passive income is certainly not a pipe dream, and as we have seen there are certainly many different ways possible to earn it. With our Endowus Income Portfolios, income investing is made easy, and in just a few clicks, you can get started with a solution for your specific income needs.
Alternatively, you can also pick and choose from our curated list of funds that pays out dividends. These funds are chosen for their robust levels of payouts and that are backed by unique investment strategies. With our 100% cashback on trailer fees and allowing access to institutional share class funds, you will get the most cost efficient solution on Endowus.
Based on your desired income situation and financial needs, these income portfolios are built upon a robust investment process and continuously monitored by our team of experts. We do all the work behind the scenes, so you can invest better to live better. To get started with Endowus, click here.
Next on the Endowus Fin.Lit Academy
Read the next article in the curriculum: Dividend investing in Singapore for beginners
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