I wish I earned without working
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disclaimer: This blog is for informational purpose only and must not be constituted
as financial advice. Your capital is at risk in some investment options
outlined here.
Is that fantasy? Not really - with some planning over time this is achievable.
To understand how almost anyone can do it, let us understand few basics of
investment.
First, have a look at the following diagram to understand different types of
incomes.
We can group income under two broad categories:
Active = You earn only when you work. You don't work,
you don't earn (or get paid). This is typically when you earn your salary in
exchange of your time. Your typical 9-to-5 day job falls under this bucket. All
employees fall under this. If you are self-employed (and bill your client by
hours worked) you also fall into this bucket.
Passive = You earn irrespective of whether you are actively working
or not! This happens when you earn from investment.
This type
of earning can predominantly of two types:
Capital gain = When you buy something at a lower price and then on
a later date you sell it for a higher price, pocketing the difference as
profit.
This includes stocks/shares, gold, lending (i.e. bonds/fixed deposits etc.) and
so on.
Cash flow = When you buy an asset and that asset generates regular
income i.e. cash flow. This includes rents coming when you let out your
properties, royalties, dividend from stocks/share, dividend
from business where you have invested (but someone else is running it on a
day-to-day basis) etc.
Some investments can generate both capital gain and cash flow. Like properties
generating rental income as well as capital appreciation over years,
stocks/shares going up in value as well as generating dividend etc.
If you want to earn comfortably without working, you need to focus on cash
flow income.
Why not focus on capital gain? This is because capital gain is often not
guaranteed and bit like jam tomorrow.
Share market may crash, property price might fall. Of course, some capital gain
are guaranteed like government backed bonds (or fixed deposit) where you are guaranteed
of a percentage return. But unless you invest massive amount of money on those
schemes, returns are usually very small and would not allow you to earn
handsome amount to cover your bills. On the other hand, cash flow income
is frequent and you can see the cash in your hand (or bank account) regularly.
Of course, there are some risks like your tenants may default; your business
might start making loss instead of profit due to changing market condition and
so on.
Note that
a prudent investor should invest for both capital gain and cash flow in using
multiple routes so that in case one income stream fails others can be used as
backups.
So,
coming back to the million dollar question - how do you generate enough cash
flow to make a living without working?
First, you need to calculate your outgoings. Everyone has different need and
want. Assume the amount is E per month.
So, your cash flow income must be I per month where I > E (obviously).
Then the problem becomes how to generate I? Invariably
it involves investing some capital C to buy assets which would generate cash
flow.
There is a proverb that you either earn compound interest or pay it. The
essence of this statement is that time matters. For healthy capital gain growth
you need to be invested for a fairly long amount of time. There are exceptions
like short selling but that is like gambling and not recommended unless you can
risk losing large amount of money.
The well tested (but not without some associated risk and operational
difficulties), income generating assets are (not an
exhaustive list):
·
properties
/ real estates
·
funds
(generating regular incomes)
·
bonds /
deposits
·
businesses
(where you have invested in return of some share of business e.g. angel
investment)
·
royalties
(e.g. selling your books or intellectual property rights - you need to be genius
for this)
I
understand it is easier said than done but it is definitely doable and plenty
of ordinary people have done it.
Happy investing.