What is passive Income?
The term passive Income refers to a stream of cash that requires minimal effort and time. This can be money from side hustles, investments, or properties. The goal is to have a constant flow of money without having to commit daily time and effort to a job.
What qualifies as passive income is not always clear. Others believe that dividends and interest are the only “true passive” cash streams. Some people believe that Income from real estate is passive enough to be counted.
Active versus passive Income
You can feel more secure financially if you have more than one income source. You can achieve this by adding passive Income to your active Income.
Active Income is the money you earn by working. This includes salary, tips, commissions, or fees. Investing money, time, or effort upfront is usually required to create passive Income. You want to eventually receive a steady cash flow with minimal or no ongoing effort. Active Income, on the other side, stops when you stop working.
It may take many years for your passive Income to pay off, and you might earn inconsistent amounts.
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Ideas for passive Income
You can earn extra money by investing in financial assets, but you could also start by creating your purchase or sharing one you already possess. Consider some of the most common passive income options.
Dividends are payments made by a company to its shareholders on a regular basis. Dividend payments aren’t guaranteed, and the value of an investment can rise or fall.
Dividends can be earned in a number of ways.
- Purchase shares in a company. Investors buy shares of companies that have a history of paying regular dividends. ASX-listed firms pay dividends twice a year. Dividends are a portion of the profits. Companies in Australia can distribute either franked or nonfranked dividends. Tax credits are attached to fully franked dividends. Depending on your circumstances, you may be eligible to use them to reduce your tax bill.
- Invest in a Managed Fund. A managed fund is another investment option that offers dividends or Income. A managed fund is a pooled investment where investors pool their money, and an investment manager purchases and sells assets for everyone. Exchange-traded funds may aim to replicate the returns of a commodity or index, while single-asset funds may concentrate on a particular asset type, such as cash, bonds, or shares.
- Real estate investment trusts (REITs). Investors in commercial real estate can receive Income from REITs without having to become landlords.
2. You can also find out more about the Interest Rates
Savings accounts, term deposits, government bonds, or corporate bonds can provide a steady income with low risk.
Most saving accounts offer a base and bonus rate. You should always read the fine print of the report to see if you need to meet any conditions to receive the bonus interest. The government’s Financial Claims Scheme also covers deposits of up to $250,000 for each person.
Term Deposits guarantee a rate of interest for money you agree to deposit away for a specified period.
Bonds involve lending money to a government or company that is responsible for paying regular interest until maturity. Corporate Bonds offer higher interest rates because they are more likely to default.
Nerdy tip: Savings accounts tend to provide a lower return but are safer. You could lose money if the interest rate of your savings account falls below the inflation rate.
Renting out an investment property, either for a short-term vacation rental or a long-term lease, is another popular strategy to generate passive Income.
Renting out a property is not always feasible because of the upfront costs and maintenance. Outsourcing management and maintenance is a popular way for investors to reduce their workload.
If you have taken out a mortgage to purchase the investment property, you can use tax breaks to offset your rental Income. You could receive a 50% capital gain discount if you hold your investment property for a minimum of one year before you sell it.
4. Marketplace or peer-to-peer (P2P) lending
You can also lend to ordinary borrowers via a marketplace for peer-to-peer lending as an alternative to investing your money in corporate and government bonds. In general, P2P loans offer greater flexibility and higher returns than traditional savings products.
P2P lenders use online platforms to connect borrowers with investors. The operator receives regular payments from the borrower and passes them to you. Some operators let you choose whether to lend to an individual or a business or to invest in a loan portfolio.
P2P operators check borrowers’ repayment capacity and risk of lending. Platform operators cannot guarantee that you will get your money back, even though they are required to act responsibly in order to maintain their Australian Financial Services license (AFS). P2P loans tend to be unsecured and have no government protection.
5. Share economy
Online marketplaces offer more than just lending platforms. They also allow you to earn money by sharing what you own. You can, for example, rent out your spare room when you own a home or your car when you are not using it. You could rent out your garage or parking space to nearby workers if you live in a central location and own a garage. Check the implications of any insurance policies before renting out anything.
6. Low-input businesses
Starting a business that requires little time and effort — such as a laundromat or vending machine — can be a great way to make steady profits.
7. Create your content
can now turn your skills, knowledge, and passions into paid content. You could, for example, create an ebook or an online course. If you are a photographer, you could license your original photos.
Successful bloggers monetize websites by charging companies a fee to advertise on their blogs. Some bloggers may also get paid for recommending products or linking to them if readers purchase them.
Content can be highly competitive, and it takes a lot to keep your blog or website visible.
Taxes are important.
All of these ideas for passive Income should be considered in terms of tax, as they could result in both income tax and capital gains taxes. Keep accurate records to ensure you declare the correct amount of Income and that all deductions are claimed. In general, you must keep supporting documents for your tax returns for five years.