Passive Income - How to Start Building Yours Today
The very first time I came across the massive potential of passive income was when I was pretty new in private banking and meeting up with a client to discuss his portfolio. Let’s just call him Mr. Tan (not his real name).
Mr. Tan told me that he was expecting to receive a sum of money soon and he would like to get some ideas for the stock markets.
For that meeting, we had a printed copy of his investments and stocks laid out in front of us. In the midst of the discussion, he casually pointed to one of the stocks and said “Dinah, I have a million dollar worth of dividends coming in from this stock every year”.
What? How is that even possible?!
I had been in investment banking for a decade before joining private banking. I’m used to companies making millions of dollars, spending millions of dollars and even paying banks millions of dollars in fees - these were normal to me. Getting into private banking gave me entry to the secret world of the wealthy and allowed me to peek into their investments and money mindset.
Here, I was looking at an individual who is making a million dollars worth of dividends from a single stock? What?! That was not even considering the fact that he had a long list of stocks which he owned, which brought in more dividends for him. I was definitely mind-blown at that time. However, I managed to maintain my composure and continued the rest of the meeting professionally.
A big mindset shift
When I walked away from that meeting, a big mindset shift had taken place in me. My client didn’t know that he had just given me a great gift. The gift of knowledge and what’s possible out there.
That conversation with Mr Tan made me realised how little I understood about growing personal wealth. Sure, I had more financial knowledge than the average person. I know in theory how the stock market works and how companies are valued.
However, at that time, I was spending most of my efforts chasing my single source of income - my salary from my career. My job took up most of my focus and time. After a long day of helping my clients to grow their wealth, I had little time and energy to build my own. All I just wanted to do every evening was to jump into bed and sleep or watch some mindless TV to give my brain a break.
I was not taking any action towards my personal financial future.
Passive income starts small and grows silently
As Warren Buffet famously said, “If you don’t find a way to make money while you sleep, you will work until you die.” When I understood about passive income, I realised the true meaning of this quote.
Passive income is money which comes in even while you sleep (or play or travel). Passive income does not take up more of your time to generate, once you have set up the foundation for it.
My client, Mr Tan, was not from a privileged background. He was a retired professional. He worked his adult life just like many people. He worked actively for years to earn his salary and fees. What he did differently was that he invested (and reinvested) his savings and allowed his money to compound and grow. In the process, he created passive income, which came in the form of dividends, rental income and even capital appreciation (i.e. increase in value of his investments over time).
Passive income might be small when you first start investing your money but it grows mighty silently over time.
Passive income creates freedom
The power of passive income comes from the freedom it brings. The freedom that you and I dream of.
Even if Mr Tan decides that he wanted to stay in bed and watch a Korean drama for a couple of days…
Even if Mr Tan decides to go travel around the world for the next 2 months…
Even if Mr Tan decides to go into the quiet mountains and meditate for a year…
It is okay, it doesn’t affect him financially. He has his wealth and assets generating passive income.
He does not need to worry about his living expenses
He does not need to worry about taking care of his dependents (old parents and children)
He is financially secured and has total financial freedom for himself, his family and even his future generations. He has time freedom, which to me, is the ultimate luxury.
How can you start creating passive income today?
Wherever you are in your financial journey, you can start to build your passive income. Remember that it might start small but as long as you are consistent, you can be assured that it will grow mighty.
Here’s how you can start:
Spend less than you earn
This is a golden rule to follow when it comes to your personal finances. At the end of each month, do you have savings? If you are not able to save consistently, you do need to look into your expenditure for ways to cut back on your spending. The other way is to find ways to increase your income.
If you are reading this blog, that means you have access to the internet and a gadget. These are already useful tools to a side hustle. Maybe you can make your hobby into a business? Maybe you can create a digital product for online sale. Think about creating multiple streams of income. Don’t just rely on 1 income source.
The key is to get quickly to being able to save regularly. That’s the first step.
Invest your savings into assets
If you know how much you spend per month, take that number and multiply it by 3. That is the minimum amount which you need to put aside in cash savings. This is what we call a “rainy day” or emergency fund. Given the volatile market conditions these days, it would be preferable that you have 6 months of expenses in your emergency fund.
This sum of money can be kept in the bank or in a fixed deposit (to enjoy slightly better deposit rates).
Beyond that, all excess savings can be put into assets, which can generate more income for you. Examples of assets will be stocks, bonds, commodities, real estate, busineseses etc.
Passive income from these assets will be dividends, coupons, rental income etc.
Even if your capital is currently small and you are not able to invest in real estate, you can still consider real estate investment trusts (REITs) which is easily tradeable via the stock market.
All these assets lead to passive income, i.e. your money working for you without your time involvement.
Invest in yourself
Make sure that you continue to grow as your wealth grow. Your financial future is in large part determined by your willingness and ability to invest in yourself now.
Before you put your hard-earned money into investments, you may wish to equip yourself with the knowledge and skills on how best to do it.
There are lots of information available online…books, articles, youtube videos, online courses etc.
If you feel that you need someone to help you to overcome your fears and overwhelm about investing, you can also find a finance coach for 1:1 sessions..
Grow your money mindset
Your unique money mindset is influenced by your parents, your childhood and all your life experiences. You could have picked up some limiting money beliefs along the way.
Similarly for me. I grew up in a simple family where money was barely enough. I picked up my grandma’s value of saving (excessively) and had a deep “fear of losing money”. My money beliefs were not empowering for me and prevented me from taking an active approach to investing. However that has shifted and changed as I went through my banking days, especially when I was exposed to wealthy people who had a very different set of money beliefs.
I love the quotes that Karl Lagerfeld had about money:
“Throwing money out the window brings money back in through the front door.”
“If you throw money out of the window throw it out with joy.”
What an abundant mindset! “Throwing money” are quite strong words but what I take away from his quotes is the concept of the flow of money - through spending, investing as well as sharing. Move away from scarcity thinking when you use money.
Learning from people who have attained the level of success and happiness that we would like to achieve is a great way to grow our money mindset.
You are responsible for your own financial success
If there is something that you would like to change, take action today.
It could be cutting back your expenses or working on a new income stream.
It could be investing into a portfolio of stocks and bonds.
It could be investing in yourself and getting equipped with knowledge and skills on how to make your money work for you.
It could be learning from successful role models and taking on a new money mindset.
New action to create new results. You cannot make a change unless you are committed to do the work it takes, so take a step forward and start building your passive income today!