A letter to my son: How to build passive income
This is a plan for how you can start to plan and work towards financial independence.
This is something I want to share with you about planning that leads to financial independence. I spoke about it in the F.I.R.E. (Financial Independence, Retire Early) Movement previously. I wanted to share with you what I wish I had known when I was your age.
I first learned about passive income, assets and liabilities in Robert Kiyosaki’s Rich Dad, Poor Dad. I recommend you read this book.
Like so many people I know, I used to wonder what it was like not to have to work for money. I remember in the late 1970s when the interest rate in Singapore was 11% for savings accounts. I was 14 years old, and my classmate said he had moved his $1000 savings into a bank that pays 11% p.a. That’s an extra $110 a year for doing nothing! It was eye-opening for me.
Needless to say, my classmate is now doing very well.
Many of us today face unprecedented financial challenges. The cost of living puts many into hardship, and there seems to be little relief in the foreseeable future. The fear of working into our late 60s only to find we do not have enough for retirement is worrying. What would I do differently now if I were younger?
So I have put together some information for you. I hope you will take measures to set yourself up for financial freedom. That said, this post is just my opinion and suggestion. Talk to a qualified financial advisor before you begin.
What is Passive Income
Passive income is money earned with little (or no) active effort after the initial work is done. Unlike a job where you exchange your time (with knowledge and experience) for money, passive income uses assets to make money, like the fixed deposit account I mentioned earlier.
Assets can also be investments, real estate, or intellectual property. Anything that puts money into your pocket is an asset.
Conversely, anything that takes money out of your pocket is a liability.
Therefore, the house we live in is a liability. But if we rent it out, it is an asset. The same goes for a car, a boat, a caravan, your mobile phone, timeshares, and so on. When a salesperson refers to your purchase as an “investment,” it is likely to be a liability.
So the game is simple: Accumulate assets while reducing liabilities where possible.
Is it doable?
Yes, but it requires discipline, (initial) hard work, and some planning.
As a full-time student, you may work some nights and weekends for extra money. That’s great. Start by putting aside some money every week, preferably on payday. Start small, but start.
I recommend putting $30–50 weekly into a micro investment account like Raiz or a Saver’s. Pay yourself $50 every week BEFORE you spend it on anything else (pay others). Do not touch that money.
Even without interest, you will save $7,500 when you graduate at the end of 3 years. Start small, but start.
Starting a Side Gig
Since you love to cook, consider using this hobby to start a side gig and earn additional income.
Those interesting and original dishes you create twice a week can help you set up your side gig. Start by posting the beautiful pictures you share with us on your social media account. Making money through social media platforms like Instagram or TikTok involves a combination of content creation, audience engagement, brand partnerships, and monetisation efforts. It is possible to turn your culinary passion into a (profitable) side gig.
How much you can make with your side gig depends. Set a goal of $5,000 to $8,000 over the next 3 years. I think it is doable. Save all of it in a fixed deposit account. The idea is to leverage what you are already doing so that it is not additional “work” that demands additional time or money. You do it because you love doing it.
Buy your first property
Once you have graduated, find a permanent job that pays reasonably well. If possible, avoid casual or contract work, as banks tend to prefer lenders with permanent jobs when issuing loans. And if you have saved about $30,000 by then, you can start exploring options.
You would now be in your early twenties.
Your first property should be an investment property to help pay off some of your mortgage. When you move in, rent out the best room and stay in the smallest room. The idea is to use it to pay as much of the mortgage as possible. This will be in addition to what you already pay from your salary. Over the next 5–7 years, pay down your mortgage as quickly as possible.
Find something affordable for a start. To assist Australians in owning homes, the Australian Government has introduced the First Home Loan Deposit Scheme (FHLDS) aimed at reducing the barrier of the initial deposit. This scheme allows first home buyers to purchase a property with as little as a 5% deposit without the need to pay Lenders Mortgage Insurance (LMI). The government guarantees up to 15% of the property’s value, acting as a guarantor for the remaining amount needed for a 20% deposit. There are price caps that vary depending on the location.
Remember that this is not your “dream home”. This is an asset to generate income. Don’t be emotional about what to buy. You may have realised that apartments near universities can give reasonable returns when renting rooms to individual students. Maybe find a 2-bedroom apartment for about $450,000? Talk to a good mortgage broker.
When can you buy the next property?
That depends.
If you are making scheduled mortgage payments ($3000 per month), and putting in additional payments from renting the room ($1500 per month), the side gig ($500 a month), and the money ($200 per month) into your Raiz or bank account, you should have accumulated some savings and/or equity.
Assuming you are now in your late twenties. If your career is now stable, and your salary is higher. If you didn’t buy that Porsche or caravan, or go on too many vacations. And if you have some funds stashed aside.
It’s time to speak to your mortgage broker again.
Passive income is just about acquiring assets that put money into your pocket. Of course, real estate is not the only option. You can invest in stocks and shares, bonds and cash equivalents, businesses and start-ups, collectables, online businesses, etc. As long as it is an asset that puts money into your pocket. Personally, I like real estate.
The Importance of Passive Income
Building passive income streams isn’t merely a strategy for wealth accumulation; it’s a blueprint for financial independence and retiring on your own terms. Diversifying income sources can protect you and your family against economic fluctuations and reduce reliance on your job.
Putting time and money into these means investing in your future freedom, ensuring that you will have choices in the future. Most importantly, you will have time for your family, your passions, and life’s simple pleasures, unencumbered by financial constraints.
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