Source/Contribution by : NJ Publications
We are carefree when we have a regular income coming in which is enough to provide for a quality of life that we wish to live. While living in the present attitude is perfect for living a peaceful and positive life, but it helps only until the times are good, when the good times take a U-turn, it hits real hard. Therefore, it makes a lot of sense to be prepared for the worst. According to Warren Buffet, “If you don't find a way to make money while you sleep, you will work until you die.”
This passage focuses on the need to create a source of secondary income, also known as Passive Income, and also highlights the products which you can invest in for generating an extra monthly income for yourself.
Need to Create Passive Income
Emergencies: We generally face financial difficulties in times like Job Loss, Medical or Family Emergencies, Reduction in income due to change in government policies, cyclical fluctuations, etc. Many of us have our Emergency Funds prepared for such untoward situations. But the no or low income period may stretch beyond the Emergency Fund. If you have a source of passive income, it can take care of your survival until you are engrossed with the emergency.
Financial Freedom: Having a source of fixed passive income imparts mental peace and Financial Freedom. Financial Freedom is a state when your expenses are taken care of irrespective of whether you are bringing any new money in the house or not. It's like come what may, no income low income, you will still have money for your daily bread, your kids will still go to school, your normal life will not be interrupted for lack of money. Being financially free let's you live peacefully and positively in real sense and not just a live in the moment attitude.
Post-Retirement: You may or may not need your passive income over your life, you may be lucky and not face any major financial hiccup, but after retirement, passive income becomes a must. You need money:
> To provide for your routine expenses. Regular income is over now.
> To provide for increased healthcare needs. Although, many of us might have insurance covers, the insurance policies will cover treatment for diseases and hospitalization. But the actual medical costs are much higher during old age. There are routine check-ups, medicines, physiotherapy sessions, tests, etc., which are mostly not covered by insurance and are expensive, an MRI alone costs anywhere between 6 -10K. Your passive income will be your best friend after your retirement.
Accelerate your income: Further it's not just about emergencies or extreme situations, having extra money is always nice. It's helps in advancing your standard of living, and lets you spend on stuff which you otherwise might have sacrificed.
How to Create Passive Income
Basically, you need to squeeze more money from your money. You create a portfolio of assets which are capable of generating income for you. It's like a chain, your money works to earn more money for you.
And the concept is not new. One of the primary reasons behind investing in India is generating a source of passive monthly income. We have traditionally been investing in Real Estate, with a view to get a regular rental income, or in Fixed Deposits/Post Office Monthly income schemes, with interest payout options. The interest payout becomes the source of monthly income in this case. But these conventional options have their own set of flaws. In Real Estate, there are hassles like maintenance charges, you may not find a tenant immediately after one leaves so there can be gaps in rental income, rental yields are also low. In case of Fixed Deposits, the interest rates are very low in the range of 6-7%, and that too taxable, so the monthly income will also be low.
There are monthly income options offered by Mutual Funds, like the Dividend Payout option of Mutual Funds and SWP option in balanced funds. These methods are more convenient and than the traditional options, investing is completely hassle free. And the return prospects in Mutual Funds are higher, the last 5 and 10 year returns from the average of balanced Mutual Fund schemes are 15.55% and 11.27% (As on June 30, 2018; Average of 17 schemes). So, even if your SWP is 8% of the principal amount, the extra return gives your investment a chance to grow after you meet your monthly income needs. You can seek help from your financial advisor for guidance on which scheme you should invest in and how much you should invest for your monthly income requirements.