Our time and energy are limited, and spending our spare hours on things that matter most is key to a balanced and rewarding life. Thankfully, with passive income streams, working Australians can balance their productive and restful hours whilst still bolstering their earning power.
Making money through our assets and skills via streamlined or automated income streams is an effective way to strengthen our finances without burning the candle at both ends. This is what we call passive income – making money from money, or money from assets we don’t need for ourselves.
For many, the hard part is saving and accumulating the sum or asset itself, but once you do have something that can generate passive income, knowing how to establish and optimise that income stream is key to maximising your passive income. It doesn’t matter where you place yourself on the wealth ladder or what your primary source of income is – increasing your revenue streams is helpful for and most importantly accessible to everyone, from the unemployed to those budgeting for an apartment or house.
At Best Financial Planners, we often see clients with assets and skills going unused, and with a little effort and planning, they could generate a steady and consistent passive income.
What is passive income?
Passive income is a way to generate money without your active involvement, like working for it regularly. It can involve optimising your assets, ongoing sales from something you created, renting something of yours and much more.
Passive income requires some upfront work to set up the income channel and make sure it’s best positioned to earn you money, but it’s classified as a way to make money inactively. For those looking to grow their income streams and their savings or retirement fund, any way you can create passive income is especially helpful because they don’t demand your time and energy.
How to make passive income
As passive income relies on having some form of asset or investment to begin with, the best place to start is to look at your current situation, portfolio or skills. You might have a car space you don’t use, a growing savings account, an eye for good graphic design or a passion for writing, for example, that can be utilised towards creating passive income.
Expanding your perception on how you can earn money can help you reach your savings goals faster, get out of the paycheque-to-paycheque cycle, and even overcome the barriers to proactive retirement planning. So, here are some common ways you can generate passive income:
Savings interest
We’ll start with something every reader should have: a savings account. You may or may not have a large sum of money in your savings account, but this account generates passive income for you through interest. The bank pays a percentage of interest on the sum of money in your account, as compensation for you storing your money with them, and giving them the chance to use those finances for their own services.
If you have significant savings that you want to use to generate passive income, it’s well worth exploring the bank market and comparing which savings account will offer the best interest returns. A competitive savings account will yield around 4-5% interest, while transaction or everyday accounts can offer as little as 0.1% interest rates. So make sure you’re storing your savings in a high-yield savings account to generate the most passive income and keep your money compounding on itself.
Dividends on stocks
Another, often more worthwhile, platform to generate money from your money is through investing in shares of ETFs. When you invest in stocks in a business, many, but not all, will offer you dividends on your equity. The ATO has stated that the average dividend yield for the All Ordinaries Index is 3.65%. This means that if you were to invest $10,000 in a large corporate company that offered a 3.65% dividend yield, you would receive a passive income of $365 over the course of the year.
While this rate is lower than the high-yield interest rates, share investment is considered a better wealth management avenue because your equity grows with the company’s value. If the same large corporate company you invested in follows a typical growth path, your base investment will inflate, so when you want to sell your stocks, they will be worth more, and you’ll still receive passive income from the investment.
Rental income
If you own a property, you’re likely already aware of the rental income opportunities available to you. Often, when people rent out their property, the money from the rent goes towards the mortgage repayments, but if you don’t have a mortgage, this can become immediate passive income for you.
What many people don’t consider are the countless other ways to generate rental income. These days, there are modern platforms that allow you to list and rent all kinds of assets from cars, car parking spaces, bikes, furniture, clothes, textbooks, tools, cameras and even artwork. In these instances, you’ll be lending your assets and possessions that people find valuable for a specific event or task, and you’ll earn money that you don’t have to actively work for.
Sales and royalties
If you have no assets to get a rental income from or funds to put into high-yield savings or shares, you can create something that generates passive income over time. Consider how authors and artists make money from their book and song sales indefinitely. You don’t have to be an award-winning artist to do the same. Lean into your creative qualities, technical skills and unique perspective to discover what you can give to the world.
Digital products are a great example of a modern way to earn passive income from an asset you create. These refer to graphics or artwork that you can post on marketplace sites, and people can purchase the digital file and print the graphic for themself. The money comes in like royalties without the artist having to do anything once listed, and anyone who can use a design platform can create these assets to generate passive income.
Other ways to generate passive sales and royalties income are through technical guides, ‘how-to’ books, selling your photography or creating an app and other types of valuable resources.
How to choose the right passive income ideas for you
The goal with passive income is for it to cause as few interruptions and demand as little energy and attention from you as possible. After all, you’ve probably still got your main income stream occupying most of your time and attention. Choosing a passive income stream that already matches your skills, interests and asset base is the best approach for success. Here are some criteria to assess your situation and help you identify how you can make passive income:
What resources do you have?
If you have a car that you don’t use often, rent it out. If you have a few thousand dollars sitting around, invest it or store it in a high-yield savings account. Maybe your rental has a car space, but you don’t have a car, or you’ve got some fantastic formal clothes that people would love to borrow – all of these are passive income opportunities.
Assess your skills
Stand back and take an objective look at your skills, interests and strengths. If you love cooking, DIY, art or photography, you can lean into any of these interests and create resources for people to buy.
Understand your financial goals
Maybe you’re preparing financially for a divorce, wanting to put extra money into your super or take a holiday that your budget just won’t allow. When you define what you want to achieve financially, you’ll understand how much work you need to put into generating passive income streams initially.
If you’re just trying to optimise what you already have, you can do that with some tweaks in where you store your money, but if you’re looking to build wealth, you will be better suited to investments.
Consider your time capacity
Some passive income ideas require a little more maintenance or upfront work than others. Writing an ebook is more suited to someone who has a significant amount of spare time, whereas creating simple graphics that take under an hour is better for someone working full time. Or if you’re really time–poor due to work or family commitments, see what assets you can rent out in and around your home.
Think big, but start small when planning for passive income
When all the opportunities to create a second or third income are listed out like this, you might be eager to jump in and get started with as many as possible. That’s great. But be careful not to overwhelm yourself too soon and get frustrated if that payoff takes a while to come in. You’re better off starting small, assessing your resources, trying a few different options and growing your passive income streams over time. This way, your streams are more sustainable as you’re able to maintain your involvement once the initial enthusiasm wears off.
Once your passive income starts coming in, it might be less exciting, but it is always a better financial decision to reinvest this money by placing it in high-yield savings or shares. If you consider your passive income as a wealth generator and continue living within the means you had previously done, this money will grow over time and the whole process will become even more rewarding.
For financial advice on organising your assets for passive income or wealth generation, contact us to find expert guidance in your local area from the team here at Best Financial Planners. We’ll help you choose a financial advisor or point you towards some invaluable resources for your financial journey.
