Setting up numerous streams of income is a safe way to protect yourself from the loss of your main stream of income. Better yet, setting up passive streams of income will ensure you always have money coming in, without costing you additional working hours.
So, what is “passive income”, and how can you earn this? JustMoney reached out to experts in this field to find out how they managed to do this, and how you can do the same.
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What is passive income?
According to Geo Botha, wealth manager and director at Bovest Wealth Management, the word passive, by definition, refers to accepting or allowing what happens without active response or resistance.
“When we speak of passive income, it’s to receive a certain amount of income, without actively working for it. This is the ideal source of income as it’s not bound to your time or attention, and one individual can have multiple sources of passive income, all at once,” says Botha.
He explains that the phrase “let your money work for you” refers to passive income. You invest money into a certain asset, and that asset works for you and provides you with an income.
“Let’s take a practical example. Imagine you buy a car with the purpose of using it for Uber. You employ a driver and the app does the rest. And whether you have one or five Uber drivers, it takes the same time, and a similar amount of effort to gain multiple sources of passive income,” says Botha.
He points out that investing can also be a source of passive income. For example, if you invest an amount, depending on the underlying funds, it will grow by a certain percentage above inflation, therefore providing you with a passive income with no further effort.
“Another popular example is property,” says Botha. “You buy a property and you get a tenant to rent it out and you effectively receive a monthly passive income,” he explains.
According to Louis Barnard, creator of the personal finance blog Frugal Local, passive income is money that you get without lifting a finger. You invested the money in something, and it now generates you cash.
“It's useful, as you free up your time to do things you love or work on other projects - or if you cannot work anymore, you still get the cash,” says Barnard.
You don’t need a lot of money to start
Tim Shier, who’s set up numerous businesses and NGO’s over the last six years with the objective of building passive income, says passive income is money that is made without needing to exchange some fixed amount of time for that income. Basically, it's the opposite of a salary.
“Functionally, it means you can set up an income source, and then focus elsewhere to repeat it again. It really is the ultimate way to force-multiply one's own time,” says Shier.
However, he believes it’s a fallacy to think you need large sums of money to do this.
“For most people, passive income is a dream because it typically requires a large existing asset pool from which to derive income. However, in the model I'm taking, I'm assuming I have nothing except my skills, experience, and network. How then does one generate passive income? In other words, from a less privileged position, how can you achieve this?” says Shier.
“I started with R15,000 in my pocket. Admittedly, I did have a pretty good start-up and business experience, and I re-taught myself to code going in – but that was all,” says Shier.
He gained multiple sources of passive income by starting lots of small and highly diversified businesses.
“The idea is to invest heavily in time initially, and not spend too much money. Once they’re set up, you can step back a bit and let those systems earn over the mid to long-term, with as little involvement from me as possible,” says Shier.
How to set up passive streams of income
According to Sheldon Friedericksen, chief financial officer at FedGroup, passive income is a way of de-risking your exposure to a single income, making your overall income more resilient.
He points out that there are countless ways to generate a passive income, with some of the more popular examples being:
1. Capital investment
Investing capital into an income-generating investment that pays a regular predictable cashflow on a regular, predictable frequency, such as government bonds, preference shares, or secured investment.
“This type of investment, depending on its nature, has some capital risk, but as a passive income generator, it’s predictable in that the regular payments are often based on a fixed interest rate in the financial instrument. This form of passive income investment can start smaller and grow over time as more capital is invested,” says Friedericksen.
2. Rental property
Investing in a rental property continues to be an example of a potential passive income. This form of investment can be in the residential or commercial industry, and enables an investor to leverage their investment, enabling them to acquire a property exceeding the current capital they have to invest.
“With this potential to leverage, it does create a greater risk if you are unable to service the debt you obtained. However, if successful, and your tenants do pay, with low vacancy being experienced in the property, you would’ve succeeded in purchasing an investment property using someone else’s money at a cost. You will end up with a property that generates you a monthly income, with a reserve for any potential repairs and maintenance that may be required in the future,” says Friedericksen.
However, he adds that this kind of passive income, depending how you structure the property management and record keeping, may require more effort from you as an investor.
3. New business
Investing in a new business is gaining momentum. Business investments through kick-starter style apps, such as Uber cars and Shopify stores, have gained attraction.
“The rise of these applications, and the ease with which you are able to gain insight into a potential business, the opportunity, and market, have made the decision-making easier. The methods available, such as free applications and access to website creation tools at a low cost, have created what some refer to as the gig economy,” says Friedericksen.
He explains that individuals are creating side hustles. Investing in ventures that are created and run by others, with you earning the net profit as the investor, creates the ability for you to be passive in the running of the business, while others generate an income for themselves and you.
There are always risks
Friedericksen cautions that all these opportunities, like most things in life, come with various risks to success – often the greater the risk, the greater the potential reward.
“Buying a do-me-upper property, spending your cash to fix it up, and then selling or renting it out, can generate a high reward. However, if done incorrectly, and alienating the market to your property, this can result in a potential loss,” says Friedericksen.
“It’s important for you as an individual to understand why you are looking at a passive income. Be aware of what you want to get out of doing this. Once you understand the answers to these main questions, this will guide you,” he explains.
Get rich slowly – learn patience
As a wealth manager, Botha advises his clients to invest in income-producing assets, such as the above-mentioned ones, and to steer away from debt or unnecessary expenses.
“The one characteristic that most people lack, and why they don’t build a sufficient portfolio to produce enough passive income, is patience. It takes time,” he insists.
“People don’t want to get rich slowly, they want it now. Therefore, they invest in things like Bitcoin and Crowd1 since it sells the dream of getting rich quick. Throughout the years we have seen that this ends up in tears, and most people will continue to struggle and look for the easy opportunity,” says Botha.
“But once you develop the patience, you realise that it pays to be future greedy, and you elect to eliminate instant gratification. You’ll become a force to be reckoned with as you work your way to financial freedom,” says Botha.
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