Passive Income is defined as the income that you derive from your investments. These investments include rental income, interest earned on your deposits, dividend income from stocks or income from any other investment. Generally the belief is that you only need passive income to meet your expenses post Retirement. In this blog, I would like to share my thoughts on the need to build a passive income even before Retirement. There are five key questions related to Passive Income that I would answer in the blog.
- Why Passive Income for all times?
- What proportion of financial needs should be provided by passive income?
- Is investing in equities a good idea to generate passive income?
- When is the best time to start investing for passive income?
- Is passive income the same as having an Emergency Fund?
Why passive income for all times?
I must confess that I also believed that passive income is required only after retirement. The recent COVID impact changed my view completely. I realised that there are times when you can witness significant disruption in your income which is also accompanied by a steep erosion in your wealth. How would you meet your regular expenses if such an event were to recur? The real question you should be asking yourself is how much passive income do you need and not whether you need a passive income or not.
What proportion of your financial needs should be provided by passive income?
Our day to day expenses can be categorized as Core expenses and Lifestyle expenses. The core expenses are the minimum amount that you need on a monthly basis for leading a very basic lifestyle. These include your home related expenses (rental or maintenance and utilities), food, clothing, daily commute etc. Lifestyle expenses include spends on new gadgets, white goods, vacation etc. A passive income is needed to provide for the core expenses. Core expenses generally range between 35% to 60% of your overall expenses.
Is investing in equities a good idea for generating passive income?
I have been over invested in equities all my life and have a very strong bias towards equities. But the recent meltdown was a great learning experience. In stressful times, asset values can erode quickly. Hence equities may not be the best bet for generating passive income. If companies do not make money, the dividends are likely to fall too. Similarly real estate values and rentals also can drop during economic downturns. Hence Real Estate is also not a good option! According to me, fixed income investments are the best suited for generating passive income. These could be fixed deposits, bonds, debt mutual funds or guaranteed products by insurance companies.
When is the best time to create a passive income?
The best time to create a passive income is when things are going well. Ironically when things are going well, the markets too are doing well and the investors are more than willing to take higher levels of risk. Conversely when things are bad and you need some passive income desperately, you may not have the resources to set aside to generate a passive income. Hence the mantra to get this right is to stay diversified at all times. Look at your portfolio and if you do not have any allocation to investments that can help you generate passive income, start investing in such investments now!
Is passive Income the same as having an emergency fund?
The answer is a clear “No”. Emergency Funds are to be used when there is a disruption in your regular source of income and generally, these funds can help you tide over financial needs for a period of upto 12 months. Passive Income, on the other hand, pays you throughout your life time and is not restricted to just the period where there is a financial disruption in your life.
Conclusion
Passive Income should always be a core part of your investments. The recent events have only reinforced the need to re-evaluate investment portfolios for stressed times. You need to ensure that you are able to generate passive income that can help you meet your “core expenses”. I hope that you will consider carving out a part of your portfolio that provides passive income to you at all times!
2 thoughts on “Is Passive Income meant only for Retirement?”
Making a network in Direct Selling
How does that Sound Suraj
You are likely to set up a perpetual source of income if you set up any business. I would not categorise the same as passive income. Any source of income that is stable and you do not have to work or worry about can be considered as a good source to generate passive income.
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