Passive income versus active income
Active income is what you work for on an ongoing basis. Your day job is an example of this.
Passive income on the other hand, requires a one-time burst of work that will then generate income “as you sleep”.
It requires inactive participation – perfect for smart people. There may be some ongoing work to make sure it still generates the same or more income potential, but mostly it can be left alone.
It is important to have a few steady sources of passive income. When you can’t work – by choice or by force – this will be the money that keeps you going.
They say that true financial independence comes when you can quit working on your active income and rely solely on your passive income.
Types of passive income in Malaysia
1. Property
Buy property and rent out space to tenants. To make this profitable, the amount of rent must exceed the amount of monthly/yearly payments you make (for example: mortgage, insurance, renovations, taxes, etc).
Steps to take:
• Research locations and demand
• Buy/lease the property
• Renovate (optional, but common in order to attract tenants and get high rent)
• Hire property agents to handle rental inquiries and draw up contracts
• Hire property manager to look after the property (optional, but not uncommon. Who wants to deal with leaky toilets?)
• Receive rent cheques monthly or according to agreed schedule
2. Intellectual property
Create/make software, apps, websites, books, songs, graphics, photographs and sell them on online platforms (either directly or via advertising revenue). To make this profitable, networking/marketing/advertising efforts must be ongoing so you can expose the product to new audiences. It’s possible to outsource and/or automate this.
Steps to take:
• Research what’s in demand
• Make said intellectual property and trademark it/proof of ownership
• Package it for the right target audience
• Choose selling platforms
• Market/advertise as much as you can
• Receive royalties when people buy/use it
3. Lower risk investments
Mutual funds (ASB, ASW, etc), fixed deposits, unit trusts, stocks/shares from blue-chip companies (popular big, stable companies), ETFs (Exchange-Traded Funds) and REITs.
Steps to take:
• Choose the right vehicles for you – probably the hardest part.
• Contribute monthly/yearly (you can automate this)
• Receive dividends, usually yearly (caution: you may not receive dividends if the company was not profitable that year)
4 Higher-risk investments (new)
Tricky category because higher-risk investments that are NOT scams are pretty diverse. For example, you can invest via P2P (peer-to-peer) lending platforms, ECF (equity crowdfunding) platforms, and buy into penny stocks and IPOs (Initial Public Offering)/ICOs (Initial Coin Offering).
Steps to take:
• Pick a legit platform. Refer to the list of unauthorised investment platforms in Malaysia on the Securities Commission website. If the one you picked is on the list, take your money out ASAP and report them.
• Research market conditions. Access to industry-specific insight is a must.
• Give money to them. There may be a maximum limit you can invest, so check with the platform.
• Wait for them to start making profit so you can cash out.
5. Keep valuable items
Some items make great passive income as their value grows, but there’s no guarantee that the worth will remain the same after some time.
For example, tulip bulbs and Beanie Babies used to be sold/traded for high profits, but not any more. That said, a few things have stood the test of time, but that’s still not guaranteed. For example gold, antiques and rare collectibles.
Steps to take:
• Research supply and demand, know everything about it and the market price (be expert-level, preferably).
• Purchase said items.
• Keep said items safely and in good condition.
• Sell when the timing is right to the right buyer (to be fair, it’s incredibly, incredibly hard to get the timing and buyer right).
6. Referral-type investments
Some are legit, but many can be scams. They usually make money for the top few people in the pyramid, but the rest will lose money.
Steps to take:
• Choose a platform to be part of their network, and pay their fees.
• Promote it to friends, families, colleagues and acquaintances.
• As the network below you grows, and your referrals get their own referrals, you get income from their fees.
• Collect income.
This article first appeared in ringgitohringgit.com
Suraya is a corporate writer-for-hire and the blogger behind personal finance website Ringgit Oh Ringgit. She is more of a minimalist, less of a consumerist, a konon DIY enthusiast, a let’s-support-small-businesses-over-big-corporations kinda girl. Prior to her current role, she worked in various capacities within the non-profit industry.