I still remember my first job I got after graduation. The job was great. I started my job with great optimism about a new chapter in my life. I read a lot of books on careers, including how to schmooze and climb the corporate ladder. My parents were relieved that their son no longer had to depend on them financially. There was a steady stream of 'proposals' as my status got elevated to a suitable boy. To celebrate my success, I bought a nice red sports car and rented a condo with a beautiful urban view. Soon, something started to puzzle me so I whipped up my spreadsheet and entered my income and expenses and discovered a horrible truth: I was living paycheque to paycheque. After paying my rent, car payment and entertainment expenses, I had nothing left; I was barely breaking even.
Living paycheque to paycheque is incredibly dangerous as we become vulnerable to all the financial vagaries that life can present us with. We will need to meet financial emergencies with debt. And debt has a way of snowballing, getting out of control and making us slaves to our job. I decided to rethink my life and confront wealth and being rich not as having millions or billions in the bank account but from achievable cash flow and extra income. I wanted to earn money, not just when I was awake, but when I was sleeping as well. Is there a way to earn extra income passively? There are many ways to do this with varying degrees of risk as outlined below and I’ve used some of them successfully.
Savings Account: If you think you are being taken advantage of, wait till you see how much banks pay you as interest on your basic savings account. On an average, banks pay about 0.1% – $1 for every $1000. This is nothing and as an alternative, you can consider fixed GICs that pay higher interest. Risk: There is no risk to your money thus the low interest.
Rental Property: My coworker lives in a 120 year old house in downtown Toronto. This means he is fixing his pipe bursts in the winter, flooded basement in the spring and leaky roof in the fall which all costs unbudgeted money. He rented his basement to earn some extra income to meet these emergencies. There are others who buy properties and rent them out. Risk: Bank of Canada had acknowledged that the Canadian housing market may be overvalued by up to 30%. In Calgary, one luxury home selling price was reduced from 1.4 million to 900k, a sign of panic selling due to the recent oil price collapse. We need to factor these scenarios in when investing in rental properties. As much as we would like to extrapolate, the next 15 years is not going to be the same as the last 15 years when it comes to housing markets.
Dividend Stocks: Dividend is a sum of money stable companies pay to their shareholders regularly, usually every 4 months. Royal Bank of Canada (RBC) currently pays a dividend of 4% ($40 per year for every $1000). RBC also increases, on an average, its dividend by 8% every year. If we assume a 6% increase in its share price, our investment of $1000 will turn to $1790 in 10 years and annual dividends will gradually increase to $86. Risk: share prices can increase or decrease depending on how RBC performs and dividends can also be cut, though Canadian banks have never cut their dividends. To reduce risk, we can consider investing in dividend ETFs that consist of a number of dividend paying stocks grouped together.
Arbitrage opportunities: I know of an uncle who does this: He would borrow from banks at a low interest rate (say 3%) and invest in higher interest bearing products such as dividend paying stocks, lend to small businesses, or deposit in saving accounts in developing countries that pay an interest of 10% to 15%. His profit is the difference between the amount he pays on the loan and receives from investment. He does a good job of managing the risk by diversifying. Risk: Risks include borrowers not paying as agreed, currency risk and this strategy is not for the faint of heart.
Seettu: This is the Tamil equivalent of a saving and investment club practiced by the older generation. A group of trusted people would get together and contribute varying amounts every month to a pool for 12 – 18 months and one person every month would get the money from the pool based on his/her needs. The last person to take from the pool would be earning the highest return - possibly 20% to 30%. Risk: someone taking the money from the pool and running away.
Micro and peer-to-peer (p2p) lending: Micro lending was pioneered by Bangladesh’s Muhammed Yunus who provided small loans to poor people in his country with no collateral. He was convinced that poor people can be reliable borrowers and entrepreneurs; his idea spread to other developing countries and has lifted many people out of poverty. This is what I would term as compassionate capitalism. Yunus won the Nobel Peace Prize for his effort. There are now web sites that let us lend money for varying interest rates to others all around the world. Risk: As per LendingClub.com, a p2p site, you can earn a return of 7% to 24% depending on the credit profile of the borrower. In some cases you may not receive any return if the borrower goes into distress, in which case, positive karma will be your return on investment.
Angel Investing: Imagine your friend always talking about starting a yoga studio in your neighborhood. You don’t know anything about starting a business or don’t want to go through the trials and tribulations of running one. But you love yoga and all the poses associated with it. You decide to invest some capital in her business and also conduct yoga classes on the weekends. Your friend cuts you a check every year as a dividend from the profit proportional to your initial investment, a win-win situation for you and your friend. Angel investors provide financial backing for entrepreneurs at the early stage and reap the benefit if the business succeeds. Risk: Running a business profitably is hard and as per one stat, 90% of the businesses fail in the first 5 years of inception. An angel investor can lose all or part of the invested capital.
There are many other products like bonds (emerging market bonds, corporate bonds) and REITs that provide steady income. Do your due diligence or consult a financial professional before investing as you not only want to earn income while sleeping, you also want to have a sound sleep.
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