“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 costs an average of $2 SGD. Today, the price of that same plate has increased by a whopping 75%, costing an average of $3.50 SGD per plate. Singapore’s inflation rate was recently reported in October to be at its highest in more than 8 years. This was contributed by an increase in prices across all categories like household goods, public transportation, and even recreational services. At the same time, it’s a double whammy for everyone as salary growth has also been slowing down, making it even more difficult for people to keep costs of living affordable.
As costs continue to rise, it’s no surprise that more people have been finding ways to passively generate additional income on top of their salary paychecks in order to fulfill their financial goals. In this article, we’ll 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 monetize 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, this also excludes income earned from active traders that spend time to engage in more active forms of investing as this 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 optimize 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 an earlier age, passive income can be a great way to supplement your income to accelerate your retirement goals as there will generally be a limit to how quickly you can earn from your day job.
What are some of the 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 more due diligence, there are more guided and accessible ways to do so.
Introduced back in 2009, 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 also 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.
Learn more about what robo-advisors are and what to consider when choosing one here
Exchange Traded Funds (ETFs)
Exchange Traded Funds (ETFs) or Index funds are typically tracking 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 they are also a great way to passively invest in the stock market. Furthermore, ETFs also tend to pay dividends on a regular basis as well.
A unit trust (or mutual fund, as they are known in the U.S.), 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 advisors and online fund platforms. Unit trusts are also a great 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 a really 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 profit, 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.
Want to understand the differences between REITs and Stocks to determine which asset class better suits your investment needs? Read more about it here
What makes a good passive investment strategy?
Furthermore, as everyone’s financial situation is unique, it is also 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 prioritize 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:
- 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.
Read more about the risks and benefits to income investing in our earlier article 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 all new Endowus Income Portfolios, income investing is made easy, and in just a few clicks, you’ll be able to get started with a solution for your specific income needs.
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. Get started with Endowus today.
Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.
Investment into collective investment schemes: Please refer to respective funds’ prospectuses for details of the funds, their related fees, charges and risk factors, The listing of units of the fund on a stock exchange does not guarantee a liquid market for the units. Before making an investment decision, you are reminded to refer to the relevant prospectus for specific risk considerations whicface
For Cash Smart Secure, Cash Smart Enhanced, Cash Smart Ultra: It is not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested. Investment products are not insured products under the provisions of the Deposit Insurance and Policy Owners Protection Schemes Act 2011 of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme. Interest rates are indicative and subject to change at any time.
Product Risk Rating: Please note that any product risk rating (the “PRR”) provided by us is an internal rating assigned based on our product risk assessment model, and is for your reference only. The PRR is subject to change from time to time. The PRR does not take into account your individual circumstances, objectives or needs and should not be regarded as advice or recommendation to purchase, hold or sell the any fund or make any other investment decisions. Accordingly, you should not solely rely on the PRR in making your investment decision in the relevant Fund.
This advertisement has not been reviewed by the Monetary Authority of Singapore.