Passive income is a bit of a buzzword these days but it’s not as complicated as it sounds. At its core, passive income is earning money with minimal ongoing effort – it’s about setting up income streams that, once established, can continue to run without too much involvement.
Here’s a breakdown of popular ways to generate passive income through investments like property, shares and other options.
Table of Contents
Property Investment
Investing in property is often seen as a go-to option for building wealth. It offers potential benefits in the form of both regular income and long-term asset growth. Here’s how property investments can work:
Rental Income
If you own a rental property, tenants pay you rent, which can become a steady income stream. Of course, there are things to think about, like keeping the property maintained and making sure you’re charging a fair rent for the area. But with a good property manager, this can be pretty hands-off.
Increasing Property Value
Over time, properties may appreciate in value, especially if you buy in areas that are experiencing economic development or infrastructure growth. This means that, later down the line, you could potentially sell your property for more than you bought it for. Think of it as a long game where you not only collect rent but also potentially benefit from the property’s rising value.
Things to Keep in Mind
While property can generate regular income and potentially increase in value, remember there are costs involved, like maintenance and management fees. It’s not completely ‘set and forget,’ but with good planning and the right financial advisors, it can be relatively straightforward.
Shares: Dividends and Capital Gains
Investing in shares (stocks) is another way people look to create passive income. Here’s how shares can pay off:
Dividends
Some companies pay part of their profits to shareholders – this is called a dividend. In Australia, some dividends come with franking credits, which can reduce the tax you owe on the income. Sounds technical, but it’s just a tax benefit that some Australian companies pass on to their investors.
Growth in Share Value
The value of shares can increase over time as companies grow and perform well. This can present opportunities for investors to sell shares at a higher price than they originally paid, resulting in capital gains. This is where some people see the biggest gains – but it’s also where the risks come in, as share prices can go down too.
Reinvesting Your Dividends
Some investors choose to reinvest dividends into buying more shares. This approach can gradually grow your investment over time without needing to add extra funds.
Exploring Other Investment Options
While property and shares are popular, they’re not the only options for generating passive income. Here are a few other ways people might look to create some extra cash flow:
Cash Investments: A Safe Place to Start
Cash investments such as term deposits and high-interest savings accounts can earn interest over time. It’s straightforward and involves putting your money into a bank account where it earns interest.
While the returns are generally modest, they’re considered low risk, making cash investments a good introduction to passive income. They can also help diversify your portfolio by adding some stability and providing a reliable second income stream without much complexity. Plus, the funds are usually easy to access, which is handy for any unexpected expenses.
Managed Funds
Instead of picking shares or investments yourself, you can put your money into a managed fund. Professional fund managers handle the investments, spreading your money across a variety of assets. It’s a hands-off approach for those who prefer not to dive into the details.
Bonds
Think of bonds as a type of loan where you lend money to a government or company, and they pay you interest over time. It’s a more predictable way to earn, but like everything else, it comes with its own risks.
Why Understanding Passive Income Matters
Knowing how different types of passive income work is helpful but it’s also important to keep realistic expectations. While some people find great success with these methods, they’re not entirely “no work, all reward.” There’s still research to do, costs to consider and risks to be aware of.
If you’re new to investing, it’s a good idea to start small and learn as you go. Diversifying – or spreading your investments across different areas – can also help manage risks.
Learning More About Your Options
At Carbon, we’re all about making the complicated simple. If you’re curious about passive income, there are plenty of ways to explore and learn more. Whether you’re looking to dip your toe in or dive deeper, understanding the basics is a great first step.
You should take into account your financial goals, comfort with risk and how long you plan to invest. What suits one person might not be the right fit for someone else. While passive income can be a valuable part of a financial strategy, it’s wise to research thoroughly and seek guidance from a professional to ensure you make informed decisions.
How Carbon Can Support Your Wealth Journey
This guide gives a broad overview of passive income strategies but creating a plan tailored to your circumstances can be more complex. Carbon Wealth Management offers resources, insights and expert advice to help you understand your options and find the right fit for your situation. Speak to our financial planners today!
