Passive income is key to building wealth and increasing financial security.
Bestselling author and financial expert Tom Corley spent years looking into the habits of self-made millionaires. Among other things, he found that two in three millionaires have several streams of income. This means they’re making money not only from their main job or enterprise but also from passive income.
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What exactly is passive income?
Passive income is income that doesn’t require active participation to maintain. Some forms of passive income require an investment of time and effort at the beginning, but they eventually ‘run themselves’ with little effort.
What are examples of passive income?
Businesses and trades
Any business activity that doesn’t require regular involvement could be considered passive. For example, let’s say you invest £100,000 into a business and become a silent partner. This would mean you regularly receive a percentage of the business’s earnings but don’t have any direct participation in the running of the business.
Royalties from the sales of books, videos or music.
Selling digital products on platforms such as Etsy. This could be anything from patterns to printables to ebooks that are uploaded once and can be sold indefinitely.
Dividend-yielding stocks are those that pay cash to all shareholders on a regular basis (usually several times per year). Because dividends are paid based on shares, the more stocks you buy from a specific company, the more you’ll receive in dividends.
To reduce risk, you’ll have to do your homework early on to see which stocks are worth buying. But once you’ve invested in them, you can just wait for the passive dividend income payments. Many well-known companies, including PepsiCo, IBM and Johnson & Johnson pay dividends.
To reduce the risk even more, you should look into exchange-traded funds (ETFs). This is a group of stocks, commodities and/or bonds grouped under a single name. They are more liquid and less expensive than single stocks.
Rental activities aren’t always considered passive. If you’re in charge of the property, you will have to deal with repairs, talking to tenants and cleaning when somebody moves out. That’s a lot of time and effort invested in the business. However, if you hire a property management company to deal with the property, your rental income can become passive.
The tax-free ISA deadline is approaching!
If you’ve not made the most of this year’s ISA allowance of £20,000 you have until midnight on 5th April before the allowance resets.
A stocks and shares ISA could be a great tax-free way of investing for the future. To help you make a good choice, MyWalletHero’s experts have reviewed and ranked some of the UK’s top stocks and shares ISAs.
Keep in mind that tax rules can change, and the value of any benefits depends on your personal circumstances.
Can passive income make you rich?
Even if you love your career, jobs are dependent on other people. Companies close and bosses change. Having a passive source of income can not only keep you safe in times of financial instability but can also help grow your wealth and fund your retirement.
Other reasons to work on building passive income are to:
- Create an opportunity to retire early, if that’s what you want
- Provide an additional source of income for financial emergencies
- Break the cycle of living paycheck to paycheck
- Offer freedom to pursue your passions
- Become location independent. If you’re not tied to a job, you’re free to travel, work on the go or move to another city at any time.
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