Our spending and saving habits develop over time, and it is because of this reason that they are often hard to change. Economists use a phrase called “propensity to consume,” which suggests how much of additional portion of $1 earned will be consumed by us. For example, if I earn an additional $100 a day and spend 90% of this $100, my propensity to consume will be 0.9, which is often considered a high number. We often fail to change our propensity to consume because our spending patterns are deeply rooted into our psyche.
Since our spending habits are hard to change, little bit of passive income can help us to support our already-established spending habits without actually putting strain on our regular income.
Passive income is an income which is received on regular basis with little or no effort. However, to reach to a level where you don’t have to do anything and earn little extra on regular basis, you need to take some efforts to find avenues from where passive income can flow.
Although it would be nice to earn little bit of extra income without putting in any effort, you’re going to have to put in some effort at the beginning. First, you must be clear about why you want to earn passive income. Is it that you want to support your existing lavish shopping? Is it that you feel uncertain about the future and want to have alternative sources of income? Are you finding it hard to earn enough regular income to support your family and yourself, therefore you need extra passive income?
Searching for the right reasons to earn little bit of extra income may help you to see your present circumstances in a more effective manner. For example, if you want passive income because your regular income is not sufficient enough to support you, you need to evaluate as to whether you are in right profession or job? If work is not sufficiently paying you according to your skills, you may need to change your job rather than committing yourself to generating passive income. So clearly decide as to why you need passive income and where you will spend it.
There is a very famous economic theory on our spending and consumption habits which sheds a lot of insight on the ways in which we can customize our spending patterns as we progress in our lives. This small and beautiful hypothesis suggests that we, as individuals, smooth out our consumption and saving patterns over our lifetime.
As an individual, you need to determine what stage of your life cycle you are in right now. Are you single? Are you married with no children and dual income? Will your spouse leave his or her job if you decide to have kids? Are you nearing your retirement? These are simple questions which you need to ask yourself and clearly establish answers for them. The benefit of this exercise will be enormous because your life cycle will determine your saving and consumption patterns, and thus, you can easily decide on how much passive income you require.
For example, if you are married with a single income and have two school-aged children, your consumption requirements may be different as compared to a person who is single. Thus, identifying your stage of life will help you to clearly assess how much resources you need to put into the source which can generate enough passive income to support you.
Say you want to invest in real estate and rent to tenants. You must first decide whether or not your existing income will be able to bear the burden of additional mortgage payments. What if you are unable to find renters? Will you be able to afford your other expenses as well as additional mortgage payments until you rent out your property?
You will probably never be able to generate passive income if you don’t cultivate the habit of saving. Probably the first and only rule to earn passive income is to save first. Save even if it’s only 1% of your income, and you will build the momentum to accumulate sufficient money.
On paper, it may seem easy to invest in real estate and earn the rent as passive income, but in a practical sense, it is often difficult to translate this investment into income. Identifying the source which will generate a stable passive income is probably the biggest challenge you might face. You may require external help. Most activities that generate passive income, like starting a blog or selling items on Craigslist or eBay, can end up taking so much time that they aren’t really “passive” activities anymore.
Similarly, putting your money into real estate in an economic scenario like the current recession may only result in the depreciation of the value of your property, which can cause you to lose on value and win on earning interest. So clearly identifying the stable and trusted source is one of the key issues you need to look into.
If you are too busy in your life and job and have lots of responsibilities, you need to play safe. One of the easiest and probably best options to start with for earning passive income to invest your money into high interest paying saving accounts. A simple search on comparison sites can give you a little insight into what kind of rates are being offered by the banks and financial institutions on the saving accounts. So start putting your extra money in high yield saving accounts.
Another good and probably the safest option is to invest into government securities. Government securities may offer low returns, but they are safe and can support your life style. Don’t go for stocks because investing in stocks requires a certain degree of investment acumen and financial expertise. Always play safe even if you have moderate level of understanding as to how the stock market works.
Please remember that your passive income may not be higher than your active income. Your goal should be to achieve a combination where both incomes are greater than your current active income. Don’t expect too much, but always remain optimistic. You and I may not be as lucky as J.K. Rowling or Dan Brown, but we both certainly deserve a good vacation.
Remember that you should remain playful, enjoy your journey, be compassionate and kind, and never become greedy. Keep in mind that our needs are already taken care of by the source which has created us all–we need only to trust in that source. Having passive or active income is just another way to receive what is already ours..
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