Passive Income: What It Is and How to Make It?

It is an undeniable fact that we all aspire for a better quality of life for ourselves and our families. More often than not, there is a direct correlation between your income and quality of life you lead, at least in the materialistic sense. Whether you are in a full-time job, running a business, or working in the growing gig economy, having multiple income streams always helps. It does not only allow you to make additional money but you also feel financially more secure.

That’s where passive income kicks in! Having a passive source of income allows you to make money even while you’re asleep. Let’s explore what passive income is and how you can go about building multiple streams of passive income for yourself.

What is Passive Income? 

There are two types of income – active income and passive income. Active income is when you play an active role in the money-making process. Working in a full-time job, running a business, providing professional services, and working as a freelancer are some of the most popular sources of active income. One aspect common to all the aforementioned income sources is that you are compensated with money for the time you invest.

Passive income is what you earn without playing an active or functional role in the money-making process. A simple way to understand it is this – you earn an active income by working for money, and you earn a passive income by making your money work for you. What makes the idea of passive income so exciting is that you generate wealth even while you sleep, travel or enjoy some leisure time with your loved ones.

Benefits of Passive Income 

There are several advantages of having a passive income. Here are five major benefits of passive income that make it worth the initial effort and investment:

Reduces dependency on your full-time job

The job market these days is full of uncertainty and small businesses usually do not have a fixed regular cash inflow anyway. What if you lose your job or your business shuts down? For instance, millions lost their jobs during the pandemic. But those with a financial cushion were better prepared to face the economic crisis that followed. Cultivating multiple sources of passive income allows you to have peace of mind and create wealth in the long term.

Improves financial stability

Underemployment is a major problem in India. With the increasing cost of living in metropolitan cities, most working-class professionals are not satisfied with their paycheck. According to a recent survey, 80% of salaried employees are out of cash by the end of the month. In some cases, they even have to resort to taking personal loans from microlending platforms that charge a hefty interest rate. Having a passive income can help you avoid such a financial crunch. 

Allows you to make money while you sleep

When your money works for you to create passive income, it does so even while you are asleep. Your passive income streams will continue to generate interest, dividends, capital gains, monthly pensions, and other forms of income even when you take a vacation, a career break, or if you choose to retire early. As your assets continue to compound, your passive income will keep increasing, and there could come a time when your passive income exceeds your active income. That’s when you will finally achieve financial freedom, a state where you do not have to work to make your ends meet.

Early retirement

If you are living paycheck-to-paycheck with barely any savings and investments, there’s a great chance you might have to delay your retirement. But by developing some streams of passive income, you can consider taking an early retirement. So smartly plan your additional funds from passive income to enjoy an early and comfortable retirement.

Allows you to diversify risk

Some of the most popular investment-oriented ways to build passive income include real estate investments, investing in bonds, dividend-paying stocks, and peer-to-peer lending. These options offer you differing levels of diversification and risk. As with any investment, it’s important to compare their potential returns against the risk posed to build a diversified portfolio.

How to Make Passive Income in India?

Thanks to technological advancements, getting started on your passive income journey is fairly simple and easy. You can explore investment instruments and start making investments online, from the comfort of your home! Here is a list of six best passive income sources that you might want to explore:

Investing in debt instruments

This is one of the safest ways to generate passive income. Investing in a debt instrument basically means you are lending your capital to the government (government bonds/securities/certificates) or a business (corporate bonds/debentures). The government, obviously, is the safest borrower you can lend your money to, however, corporate bonds are a bit on the riskier side. Corporate bonds backed by a collateral, also known as secured corporate bonds, are less risky though as the investors’ money can be recovered upon liquidation of the company assets in case of a default.

These debt instruments enable investors to earn a fixed interest on a monthly, quarterly, or annual basis. Generally, the interest rates can vary from 3 % to 12 % per annum, depending upon the risk involved – the more the risk, the higher the interest rate. When choosing a debt instrument, you must thoroughly research the issuer, check their credit rating and analyse the associated risk to make an informed decision. 

Renting out real estate

Rental income is one of the most popular types of passive income in India. Just as debt instruments, it is also one of the safest ways to earn a passive income. Rental income can be of two types. You can either rent a commercial property such as a shop or an office space or a residential property such as your house, apartment or co-living space. Before you rent out your property, make sure to sign a written agreement with the tenant to avoid any kind of legal trouble in future.

Blogging

Blogging is a lucrative and creative way to generate passive income, though it requires a slightly more active approach. However, once your blog attains a certain degree of reputation, you continue to earn from the already published blog posts even if you are not posting regularly. Choose a topic that you feel passionate about or one that connects to your core skill. 

You can also consider video blogging (vlogging) if you are not camera-shy and have good editing skills. Start posting blogs or vlogs regularly, and ensure to market them well. As your audience grows, you can earn passive income by monetising your blog with ads or brand partnerships.

Investing in the stock market

Investing in equity or the stock market is often considered to be a high-risk investment option. This is because the stock market is fairly volatile and highly susceptible to external events such as recession, a worldwide pandemic, international warfare, and bad press.

That being said, investing in the stock market has the potential of generating high returns. Moreover, if you invest in companies with high dividend yields, apart from share price appreciation, you also get paid regularly in form of dividends. Please do your research and analyse the health of the financials of the company before investing your hard-earned money.

Affiliate marketing

This is an income model where you monetise your existing digital footprint. For instance, you might have thousands of Facebook friends, a large Instagram following, or a blog readership. Affiliate marketing involves leveraging your audience/following to earn a passive income for yourself. For example, you can sell a product/service on your blog/social media page. Whenever someone buys the product/service through your link, you earn a certain fraction of the amount paid by the customer. You are essentially being rewarded for recommending that product/service to your audience.

Peer-to-peer lending

Peer-to-peer (P2P) is a new lending paradigm where individuals can access a loan directly from other individuals, thus cutting out the middleman, which is usually a traditional financial institution such as a bank/NBFC. To generate passive income through this model, you need to register with a credible peer-to-peer lending platform and pledge the amount you wish to lend.

You earn passive income through the interest the borrower pays on the loan from your pledged funds. The interest will be credited to your bank account every month on a specific date, and you also get back the principal on a predetermined date. P2P lending can be quite risky, especially when there is no collateral backing the loan.

Bottom Line

Building passive income streams is an ingenious and decisive investment in your future. It’s not just about financial stability or being able to retire with savings but also a stepping stone to realising all your financial and life goals. Those who start building passive income early in their life are generally able to retire early. However, this does not mean they stop working; it just means they stop doing things they do not enjoy and pursue projects and work they love. Passive income can be the route that leads to living life on your own terms.

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