Most of us know how to make money:
Study hard, get good grades, find a job, get paid.
Some of us have even discovered the secret to making more money:
Work hard, get in your boss’ good books, get promoted, get paid MORE.
Sounds simple enough? Well, recall that last meet-up you had with your friends where you asked them “how’s work”.
Truth is, regardless of our age, we’re still complaining about our companies, our jobs, our bosses. We’re sick and tired of the 9-to-5 grind every Monday to Friday, and deep down we’re praying the weekend never ends.
If only money could land in my pocket, every month without fail, without me having to worry about work, or getting fired 🤔
Making money with money
Two weeks ago I was having a conversation with my Grab driver on my way to a client meeting. We were just chatting about his experience with investing and he said this:
“Singaporeans know how to earn money and spend money, but not many know how to make money with money.”
I thought it was interesting because of how that statement spoke true of some of my own clients. I’ve met quite a number of people who’re just waiting for the maturity of their few savings plans, amounting to a few tens of thousands of dollars after saving for a number of years. And when I ask them “So what are you going to do with the money?”, more often than not, their response is “Slowly spend lor”.
Unknown to many, the art of making money with money (or, to use the original Chinese term, 用钱生钱) is and can be unbelievably simple. Below are a few ways you can get started, regardless of your age and income level.
Disclaimer though, this list is by no means exhaustive. There are a probably hundreds of ways you can build a passive income stream for yourself, but I’ve chosen to only discuss the following because (1) I don’t want to bore you, and (2) these are basically idiot-proof so you can get started right away.
CPF LIFE
CPF LIFE is a national longevity insurance annuity scheme that insures you against running out of your retirement savings. If you don’t already know, you’ve been automatically enrolled to this scheme. If you’re an employee, chances are you’ve already accumulated some money in your CPF Ordinary (OA) and Special Accounts (SA). The balances in these two accounts will form your Retirement Account (RA) when you turn 55.
The aim here is to accumulate enough in your OA and SA to meet the Full Retirement Sum (FRS) by your 55th birthday, because once you’ve done that, CPF LIFE will give you a monthly payout for life, starting age 65.
For those turning 55 this year in 2021, the FRS is $186,000, accumulating which would give a payout of around $1,400 to $1,500 a month. For those of you who are younger, do note that the FRS has been increasing by about 2-3% every year. That means that if you’re 25 this year, your FRS could be about $393,500 by the time you turn 55.
Income-paying endowments
Another way of building a passive income stream for yourself is to purchase an income-paying endowment. How it works is simple: You put in a lump sum single premium, and after a period of time (usually 3-4 years), the policy will pay out a monthly income to you for the rest of your life. For such policies, the yield on capital is usually around 2% per annum, depending on the underlying par fund performance. In the event of your passing, your capital is guaranteed and will be paid out to your family.
To increase one’s income yield, some may consider taking leverage. Put simply, this involves taking a loan from the bank to fund a larger policy, allowing you to get more income with the same capital. I’ll probably explain this in more detail in another article in future, but if anyone’s interested in find out more, do drop me a text.
But do take note, taking leverage does come with interest rate risk — if the interest rate on your loan increases due to various reasons, it may result in you getting less income.
Investing in a dividend/coupon-paying portfolio
Investing is also a common way many people generate passive income. There are also many investment instruments that give regular payouts — for example, some stocks pay out dividends to shareholders and some bonds pay out coupons to bond holders. In extension, many mutual funds and ETFs also pay out a fixed income to investors at varying rates.
But with all investments, you will be exposed to fluctuating prices based on market conditions. The way to mitigate this is by ensuring that your portfolio is well diversified across geographical regions, sectors and asset classes.
How much do I need?
It’s actually pretty easy to calculate the total amount you need to generate sufficient income. You just need to determine the amount of income you desire per year, then divide that by the expected yield (which is the annual percentage rate at which your income is paid out).
For example: Mr Tan wishes to get a passive income of $5,000 every month (or $60,000 per year), and he expects to earn a yield of 5% per annum with his portfolio.
Total amount Mr Tan needs to accumulate = $60,000 / 0.05 = $1,200,000
Conclusion
As I mentioned earlier in the article, the above aren’t the only ways to generate passive income. Other ways include purchasing a property and renting it out for rental income, but this requires a large capital output and often involves issues around tax and the occasional ‘tenant-from-hell’, so it may not always be the most straightforward way.
In addition, diversifying your portfolio into multiple income streams can help hedge against risks — when a single stream is reduced or runs out, your total income won’t be affected as much.
Most importantly, the key is to start building your portfolio early. As a licensed financial advisor representative, I’m able to craft a suitable income-generating portfolio for you and your family, based on your risk profile and individual needs. If you’d like more information, feel free to drop me a text on WhatsApp or call me at 9622 6231. I’d be happy to share with you more any time.
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My Money Musings 