passive income

Mar

2023

Are You Working for Money?

Reading Time: 4 minutes

Are you working for money? Most people are. Unfortunately, only a few people work because they love what they are doing. If you are one of those people who gave up their dream job for a high paying job, don’t worry there are ways on how to turn this situation around. But first, you need to first understand how money works.

By definition, an income is the money that you received from work or from your investments. Without income, you will not be able to pay for your living expenses.

There are two types of income: active and passive income.

Active Income

Active Income is the money that you received for the work or services that you rendered. Examples of this are your salary, commissions, wages and tips. It is termed as such because you actually need to be active, do something and spend your time, effort and energy before you can receive the income. If you stop working, then your income will also stop.

All salaries of employees are considered active income. Professional earnings of lawyers, doctors, architects, engineers and other professionals who have their own clinics or offices also fall into this category. The income of a managing member of a business is also considered active income.

Kinds of Active Income

There are two kinds of Active Income:

Salary Income – is the payment that you receive as an employee.
Profit Income – this is the money earned by entrepreneurs by selling goods or services for a profit. It is considered active as long as there is material participation involved.

The poor and the middle class mostly rely on active income. That is one of the reasons why they are stuck in the rat race all their lives. They think that hard work alone is the solution to their financial worries. Problem occurs when that one source disappears; which is one of the lessons people learned during the pandemic. Many were caught off guard. Because of the lockdown, a great majority of people were not able to worry. As a result many lost their single source of income.

Never depend on a single source of income.
– Warren Buffet

Statistics will show that many successful persons during their prime ended up broke upon retirement. Even if your income is high, it is never enough. You are still restricted by your age and your health. Thus, many people go broke once it is time for them to retire.

Active income also constricts your time. There are those who earn lots of money but they never have time for their families because their time is not their own.

Don’t let making a living prevent you from making a life.
– John Wooden

Do You Work for Money?

If you go to work because you HAVE to not because you WANT to, that’s an indicator that you are working for money. Even if your income is high, that does not change the fact that you are still a slave, only a rich slave. Don’t be a slave to money. Don’t let money control you. Learn how money can work for you.

Do You Let Money Work For You?

This is one of the ways in which rich people think differently. The rich understand that to become truly wealthy, you need to create multiple streams of income. Relying on a single source is simply too risky. And besides, they know that the more sources of income they have, the faster it is for them to reach their financial goals. That is why the wealthy focus on earning passive income.

Passive Income

Passive income is money earned where there is little or no active effort on your part. It is not directly tied to a certain number of hours at work. It is what they call “earning money while you sleep.”

Kinds of Passive Income

There are five major sources of passive income that you can choose from:

Interest income – is the money that you earn when you lend your savings to someone else. You can lend your money to an individual. You can also lend it to private corporations or the government in the form of a bond.
Dividend Income – is the money that you earn from being a partner, an investor or a shareholder to a business. Company earnings are also distributed to shareholders from the that you own.
Rental Income – is the the amount of money that you collect from your tenants from leasing your properties
Capital Gains – is the profit that you earn with the appreciation or the rise of value of your investment. You can earn capital gains from your real estate properties and other investments such as antique and vintage items, art work, jewelry, foreign currencies, luxury watches, and even luxury bags and some l imited edition items. You can also earn this from the stock market when the market price surpasses the average purchase price of your stocks.
Royalty Income – is the money that you received for the use of your artistic or literary works. It could be in the form of patents, copyrights or trademarks. You can also earn royalty income from your blogs or vlogs.

A wealthy person is simply someone who has learned how to make money when they’re not working.
– Robert Kiyosaki

So do you want to work for money all your life or do you want to make money work for you? If you want to have a life where money works for you, you need to have passive income. The key is to start with active income. Then, slowly build your wealth through the money jar budgeting system. And before you know it, you will be enjoying your retirement earlier than your contemporaries.

Good luck!

Updated version. First published in Pinoy Smart Living on 05.02.2019

Feature Image by Jose Conejo Saenz from Pixabay

Nov

2020

Stocks or Stock Options: Which is Better For You?

Reading Time: 4 minutes

One lesson that this pandemic taught us is that we should always have money set aside for future use. However, parking your money in a regular savings account is never a good idea because of inflation. Warren Buffet, one of the world’s most successful investors of our time has this to say about investing in cash:

The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time… Cash is a bad investment over time.”
– Warren Buffet

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Thus, it is always better to invest your money. But, there are so many investment vehicles available out there. How to know which one is best for you? If you want to stay liquid and are willing to take a little risk to get higher returns; then, you can try investing in stocks or stock options.

Stocks

A stock means a share in a company. As part-owner of a company, you get a claim on the company’s assets and earnings. You cannot make decisions on the management of the company though. As a common shareholder, you do however have the right to vote on major issues such as changes in charter or board of directors during shareholder’s meetings.

How to Profit in Stocks?

There are two possible ways to earn money from stock ownership. First, you can get a share of the company’s earnings through dividends. Second, if you need the money in the future, you can always sell your stocks and earn from price appreciation. Just like in real estate, art works, jewelries and other assets; there is always a possibility of an increase in the value of your stocks over a period of time.

Why Buy Stocks?

Owning a business entails a lot of work especially if you build your business from scratch. You need to oversee not just the day-to-day operations but also other aspects like marketing, human resource and financial management. You may be your own boss but you have a lot of responsibilities. You need to make tough decisions and sometimes work long hours.

Investing in stocks is just like owning a business. The only difference is that you don’t need to go to work at all. You can just sit back, relax, wait for your pay check and let the likes of Bill Gates, Jack Ma, Warren Buffet or Jeff Bezos take care of your money. These business tycoons will be the ones to manage the day-to-day operations of the business while you just wait for your income. Now, how cool is that?!

Furthermore, stock investing is ideal for beginners. There is a way to become a passive investor. The easiest way to invest is through Cost-Averaging. It simply means buying stocks for a set amount each month over a long period of time. There is no need to carefully watch the market.

Stock Options

Stock options are different from stocks. With options, you don’t actually become shareholders of a company. Instead, what you have are contracts. Options are contracts that give the holder the right, but not the obligation, to buy and sell stocks at a predetermined date and price.

How to Profit from Options?

There are two kinds of options: the call and the put. The call option is a contract with the right to buy while the put option is a contract with the right to sell shares at a predetermined date and price. In short, a call option is a good investment if there is an expected increase in future stock prices. A put option on the other hand, is a good investment if there is an expected decrease in future stock prices. To put it simply, stock options empower the holder to potentially profit from a trade regardless of market direction.

Why Buy Stock Options?

For one, compared to stocks, options are more affordable. You can get options for just a fraction of the price of a stock. For example, as of this writing, an Apple Inc. share cost US$119.49 while a stock option price cost only US$1 per contract and even cheaper.

Second, with options there is a way to earn money even if the market goes down. Options allow investors to use a hedging strategy to lower risk. This means that an investor can buy a call option, a put option or both at the same time if the investor is not sure whether the price of stocks will go up or down in the future. This is different from stocks wherein price appreciation only happens when the market goes up.

And lastly, since options are contracts, there are expiration dates. Contracts can either be weekly, monthly or even longer. This is good for short-term investors. It means there is no need to wait for a couple of months or even years to earn. Higher percentage returns are possible in just a few days.

However, unlike stock investing, stock options investors need proper training first. To earn a higher percentage of returns is not without risks. Thus, it is important that stock options traders know what they are doing.

Join the Free Webinar on Stock Options Trading

Stock or Stock Options: Which is Better for You?

Both stock and stock options are good investment vehicles. To know which one is better for you, it all depends on what kind of investor you are. If you are looking for something long-term then go for stocks. If you are a short-term investor, then stock options trading is for you. If you are a passive investor, meaning you don’t want to be bothered with the management of your investment, then you are better off with stocks. However, if you want to be in control of your investments, then go with stock options.

In short, whichever is better for you is totally up to you. It is a personal choice. It all depends on what you want and what will best suit your financial goals, personal interests and lifestyle.

Happy investing!

Feature Image From Pixabay images

Jul

2020

What Stage Are You In In Your Financial Life?

Reading Time: 3 minutes

Imagine a life where you are free to do whatever you want to do without having to worry about money. Wouldn’t that be wonderful? Yes, that life is possible and it is imperative that you know how to get there. Some people like businessmen, athletes, artists and lottery winners fast tracked their way to wealth. But for most of the people, the road to wealth can only be done one step at a time. There are stages to financial independence. First and foremost, you must figure out what stage are you in in your financial life right now. Knowing where you are will give you an idea on where to go next.

Active vs. Passive Income

Before you can understand the stages, you need to have a clear understanding of two basic financial terms about income.

Active Income – is the money that you earned while working. It means the income comes from your active participation or as a direct result of you performing a service. Active income can be in the form of salary, commission, tip, wage and even income from business.

Passive Income – requires little or no effort at all from your part. It is basically money that you earn from doing almost nothing.Examples of active income include income from rent, investments, dividends, trademarks, copyrights, affiliate marketing and other portfolio incomes.

Stages in Your Financial Life:

Stage 0: Financial Dependence

Financial dependence means someone else is responsible for you in your financial life. That person can be your parents, spouse, grandparents, uncles and aunts or whoever is paying for your monthly living expenses. It is perfectly normal to be financially dependent on someone else when young. If you are still in this stage, yet you are old enough to earn on your own, your main goal should now be to move on to the next stage.

Stage 1: Financial Solvency

Financial Solvency is the first stage towards financial freedom. In this stage, you no longer depend on someone else to pay your financial obligations. You now have the ability to pay for your monthly living expenses. It also means that if you have debt, you are now able to pay for your loans on time. Generally, the first step is to either get a job or start a business.

Stage 2: Financial Stability

Once you are already able to consistently meet your financial obligations on time, the next thing to do is to start saving money. Ideally, you should be able to save at least 6 months worth of monthly expenses in your emergency fund. As the name suggests, emergency funds are a stash of money set aside for life’s emergencies. It can be used for emergencies such as a job loss, health emergency or appliance and car repair. At this stage, you should also begin investing a portion of your income. A budgeting system will help you handle your money properly.

Stage 3: Financial Security

At this stage, the income from your investments should already be enough to cover your basic monthly expenses. You are no longer reliant on your active income alone because you are now earning some passive income. Even if you lose your job or business at this point, you can now afford to live a simple life without having to worry about your basic needs.

Stage 4: Financial Independence

This is the ultimate goal for most people. This is the stage of financial freedom. It is the stage where you have enough savings and investments to finance your desired lifestyle. At this stage, your passive income can now completely take over. Your basic needs as well as some comfort in life can now be sustained by the income that you are receiving from your investments. Even if you are vacationing in an island somewhere, you don’t need to worry because money is still pouring in without you having to lift a finger.

Stage 5: Financial Abundance

Some people will not be contented with merely achieving financial freedom. The next stage is for these people. In this stage, there is abundant wealth. You already have all the money that you ever need to the point that you don’t know where to spend them anymore. People on this stage usually looks into building their legacy. A legacy is basically who you are, how you lived your life and how you want the people to remember you. It is at this point that you consider how you will leave your wealth behind so it can served as a very strong foundation for the next generation.

Now assess your financial life. What stage are you in in your financial life right now? Where will you grow from here? What is your end goal?

Good luck on your financial journey!

Feature Image by Photo by Lukas from Pexels

Jun

2020

Basics of Financial Literacy: What You Need to Know

Reading Time: 2 minutes

The world is now officially on a recession. Businesses went bankrupt and millions of people have lost their jobs. Many people found themselves in deep financial troubles. Although It is impossible to undo the events of the past, it is still possible to improve your financial future through financial literacy. What you need to know for now is the basics of financial literacy.

Whether we like it or not, money is a part of our daily lives. A basic understanding on how money works can help you make wise financial decisions in the future. It will help save you financially when the next big crisis comes. Thus, knowing the basics of financial literacy is a must.

Start your financial literacy journey by reading some life-changing books on wealth and success. It will also help if you familiarize yourself with some basic terms on personal finance. Knowing some of the basic components on financial literacy is also is very important in your financial life.

Basics of Financial Literacy

1. Budgeting

Budgeting is a spending plan. It is allocating a certain amount of money for the things that you need and want. Though budgeting, you will be able to figure out if you have enough money to buy things that you want. It will also allow you to create a plan for your future spending. It is basically weighing in your income vis-a-vis your expenses and trying to create a balance between the two.

A good budgeting technique that you can follow is the money jar budgeting system. This approach allows you to be be able to meet both your needs and wants and at the same time, grow your wealth in the process.

2. Saving

Every financial guru stresses the importance of saving. Savings are the money that is set aside for future use especially during emergencies. It is common sense yet only a handful of people do it. That’s because saving money takes a lot of discipline.

If there is one thing that this crisis taught us, it is the importance of saving. Those who have enough savings will be able to rise above this crisis. Aside from serving as your emergency fund, your savings can also give you freedom. You can use it as downpayment for your dream house. Your savings can also use to buy a new car or to travel to your dream destination. The possibilities are endless.

3. Understanding Debt

Not all debts are created equal. There are good debts and there are bad debts. Understanding what they are and how they differ from one another will help you make good financial decisions when it comes to handling debts.

Almost all people in the world will have to handle debt at one point in their lives, whether it be a mortgage, a car loan, a credit card debt or any other kind of personal loans. Debts can have positive or negative effects on everyone’s lives. Knowing the basics will help people use debts for their own advantage.

There is still a lot to learn but it is definitely worth the time and effort. For now, understanding the basics of financial literacy is a good start towards your journey to improving your financial life for the better.

Feature Image by Steve Buissinne from Pixabay Images

Jun

2020

10 Basic Terms About Personal Finance

Reading Time: 3 minutes

Understanding basic money terms should be your first step towards financial literacy. It would be very difficult to start learning financial literacy, much more overhaul your financial life without understanding the basics. Just like reading for example, you won’t be able to learn how to read without knowing the alphabet. In the same way, you will never truly be able to handle your money if you are not familiar with some basic terms about personal finance.

These terms will serves as building blocks in the world of finance. Hence, a deeper understanding of the many terms of concepts of the financial world is crucial in making good personal financial decisions.

Learning and understanding some basic personal finance vocabulary is your first step towards financial freedom.

There are many important personal finance terms. But to make it easier, we have narrowed down the list to ten terms that will help you understand the basics of personal finance.

Here are 10 basic terms that you should know about personal finance:

1. Assets

Assets are any resources with economic value. Sample assets include certificates of deposits, bonds, funds, stocks, real estate or business.

A new definition was introduced by Robert Kiyosaki, author of Rich Dad, Poor Dad. He redefined assets as economic sources that you own that generate income for you. A

An asset is something that puts money in your pocket.

2. Credit

Credit is an agreement where the borrower receives something usually money or any other product or service with value with a promise to pay in the future within a specific time frame, usually with interest. In short, credit pertains to agreement between borrower and lender. Examples of credits are home loans, car loans, consumer and personal loans and credit cards.

3. Compound Interest

Compound interest is the addition of interest on the principal amount of your loan, savings or investments. In short, it is interest on interest. Thus, it has the capability to grow at an increasing amount. Use this concept to your advantage and your wealth will increase. However, this concept can also work against you especially if you have credit card debts. This is how credit card companies earn. Protect yourself and understand this concept so as not to end up a victim of enormous credit card debt.

4. Depreciation

Depreciation is the lowering of the value of an asset over time, usually because of wear and tear. Depreciable assets in your home include your cars, cellphone, appliances and furnitures. For example, if you bought a car worth million a year ago, you can no longer sell that car for the same price today because the value of the car already went down. That is depreciation. Buying depreciable assets on credit is not recommended.

5. Inflation

Inflation is a finance concept that everyone should know because it affects everybody. When the value of your money declines, that is inflation. It simply means that the same amount of money that you are holding now can purchase less goods compared to last year. So, if you have money placed in a regular savings or current account, you are loosing money every year even if you are not actually withdrawing money from your account because of inflation.

6. Financial Freedom

Financial Freedom is the state wherein you are already living your ideal lifestyle without having to work for money. You can be enjoying yourself somewhere in the Bahamas and yet continue to receive money regularly.

Financial Freedom is achieved when your passive income is greater than your monthly expenses.

7. Liabilities

Liabilities are amount that you owe somebody, a company or the bank. They are your debts and financial obligations. Your liabilities include your bills, home loan, car loan, credit card debts and other consumer and personal loans.

8. Mortgage

A mortgage is a loan in which a property or real estate is used as collateral. A collateral serves as security for the loan. Ownership of the real estate is conditional until all obligations and monthly payments are met. This is your typical housing loan.

You are not the owner of your real estate until you have fully paid your mortgage.

9. Net Worth

Your net worth is the monetary equivalent of all your assets added together minus all your liabilities. In short, your net worth is the value of everything you own minus your debts. It is a gauge to measure your financial well-being or how wealthy you are.

NET WORTH = ASSETS - LIABILITIES

High income does not necessarily mean high net worth. A janitor without debt can be considered more wealthy than a company president whose liabilities are greater than his assets.

10. Passive Income

Passive income is money that you receive on a regular basis with minimal work requirement or without you having to work. This income is generated through your investments or assets.

Examples of passive income are:

rental payments from your real estate properties
dividends and capital appreciation from stocks and funds
interests payments on bonds
royalties
income from investments
retirement income

This is the opposite of earned income wherein you need to work or exchange your time, skills and expertise to earn income. Example of earned income is your salary.

First Published in Pinoy Smart Living on 11.13.2018

Image Credit: Gerd Altmann from Pixabay Images

May

2020

How Financial Literacy Can Change Your Life

Reading Time: 3 minutes

Are you constantly worried about money? How is your financial situation during the lockdown? Are you struggling to make ends meet? Do you have enough savings to go through this pandemic? Are you struggling to meet debt obligations? Are you living from paycheck to paycheck? Do you feel that your salary is not enough to cover your monthly expenses? Are your financial worries so stressful that they are already gravely affecting all aspects of your life including your health and personal relationships? Well, there is a solution to your problem. That is, a basic understanding of finance. Financial literacy can change your life for the better.

What will you do when you have money problems? Most people will look for ways to earn more money by sacrificing their time and health. They will either get a second job or work overtime just to raise the needed money. Other people will resort to borrowing money. However, not all loans are created equal. There are good loans and bad loans. Some loans like credit cards charge high interests and can easily spiral out of control especially if you don’t know how to use them. There are some who will simply rely on government support. While these strategies may help ease your financial burdens in the short term, it is not going to permanently solve your money issues in the long run.

There is only one solution to money problems and that is financial literacy.

The single biggest difference between financial success and financial failure is how well you manage your money. It’s simple: to master money, you must manage money. –
T. Harv Eker

Financial literacy is essential in having a secure financial future. Unfortunately, financial literacy was never thought in school. For most people, the yearning to learn financial literacy only comes when they are already faced with financial crisis.

Academic qualifications are important and so is financial education. They’re both important and schools are forgetting one of them.
Robert Kiyosaki

So, what exactly is financial literacy? Wikipedia defines financial literacy as ” the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources”.

In short, financial literacyis simply understanding money and how it works. It is knowing how to budget, how to pay your bills, how to borrow money responsibly, how to save, invest and prepare for retirement. Financial literacy will help you make good financial decisions in your everyday life that will ultimately affect your overall financial situation and change your life for the better.

Working hard is simply not enough. You can be a graduate of a four-year course, have a master’s degree or even a doctorate degree but know nothing about personal finance. Even if you are earning millions, you can still end up poor if you know nothing about how money works. It is not about how much money you make but it is all about what you do with the money that you earn that matters.

It is not about how much money you make. The question is are you educated enough to keep it.
Shaquille O’Neal

More so, have you ever wondered why the rich is becoming richer and the poor becoming poorer? Contrary to popular belief, it is not because the rich are all crooks. Neither it is the government’s fault. If you want to know the answer to this question, invest your time in financial education and soon you will find out that the only thing that is stopping you from being wealthy is you.

Make your first step and start your journey towards financial literacy now.

And remember, financial literacy is a lifelong journey. It will not end by simply reading just one book. It is something that you need to learn throughout your life if you want to achieve complete financial freedom.

Edited version. First published in Pinoy Smart Living 10.19.2018Feature Image by mohamed Hassan from Pixabay Images

Jan

2020

Setting Financial Goals for a Better Tomorrow

Reading Time: 3 minutes

You have been working hard all your life yet you feel like your financial situation remains the same. You still struggle to make ends meet. What is it that you are missing? What can you do to change your financial life for the better? The answer is to define your goals. Setting financial goals is your key for a better tomorrow.

If you want to have a fresh start in your financial life, the first step is to set financial targets. Having a financial goal will help you make better financial decisions. It will also influence your day-to-day behaviour. Think of it as going on a trip. You need to know where you want to go first before you can even plan out the details of your trip. Thus, setting financial goals is important for a better tomorrow.

So, what’s your financial goal for this year? If you still don’t have one, it is for your best interest that you start having one now. No matter what age or stage you are in your life right now, even if you are already financially stable, you still need to set your financial goals.

Here are the steps on how to set your financial goals:

1. Determine what you want

In setting your financial goal, the first thing that you have to do is ask yourself. What is it that you want? Do you want to get out of debt? Do you want to have that dream house? Do you want to buy a new car? Do you want to go on that dream vacation? List down all the things that you want to have and accomplish.

2. Classify your goals into Short Term, Medium Term and Long Term

It is impossible to achieve all your goals at the same time. Thus, it is important that you arrange them according to what’s important to you. Learn to prioritise. What is it that you that you want to accomplish first?

For example, you are in your 30s. You want to retire wealthy. You have a child who will start schooling in four years time. You also have a credit card debt that is ballooning. How should you set your financial goals?

Classify your goals into:

Short Term – those that needs to be done in the near future or at least within the year. In the scenario above, your short term goal should be to settle your credit card debt first.
Medium Term – refers to a period of time that is not in immediate yet not too far in the future either. It normally pertains to those goals that you want to accomplish in 2 to 4 years time. The child’s tuition fee in the previous example is a medium term goal.
Long-term – pertains to goals in the future usually 5 years onwards. If you are in your 30s, retirement goals will obviously fall into long term goals.

3. Estimate the amount that you need

Since we are talking about financial goals, numbers are very important. You need to know the amount that you need in order to accomplish your goal. For example, your goal is to travel. Estimate the amount that you need to cover your travel expenses. Then, figure out how much you can separate each month for your travel goal. Knowing how much you need can give you an idea on how long it will take you to achieve your goals. Remember, goals must be SMART meaning specific, measurable, achievable, relevant and timely.

4. Budget

Budgeting is a must when it comes to financial goals. Budgeting allows you to have a spending plan for your income. Without a spending plan, there is a tendency to splurge on unnecessary expenses. It will also help you stay on track towards the achievement of your goals.

A good way to budget is through the money jar budgeting system. It is a system wherein you will be able to purchase what your needs and wants yet at the same time limit your spending and grow your wealth in the process.

5. Monitor your progress

Monitoring your progress is very important because it keeps you motivated. It will also allow you to adjust if not your goals but the process on how to achieve your goals.

6. Celebrate small wins

Celebrating small wins will help boosts your confidence level. It will make you feel that you are able to accomplish something and that you are now one step closer towards the achievement of your bigger goal. It will motivate you to keep on going forward.

What are you waiting for? Define your financial goals now. Setting financial goals is your passport for a better tomorrow.

Image Credit: Gerd Altmann from Pixabay Images