Passive Income Strategy : Making my salary redundant

WordAds is not an income source for me. I was hopeful when I started on WordAds in Sep 18, but till date not a penny received from them. Currently my only passive income source is investment income.

"You must gain control over your money or the lack of it will forever control you." - Dave Ramsey
“You must gain control over your money or the lack of it will forever control you.” – Dave Ramsey

I was working full-time for 9 years and when I decided to take a sabbatical, the first thought was to create an income stream to help me continue to meet my current obligations and have some cash left-over to spend freely. There were few cut-backs necessary, but with some consideration it was possible to build a cash flow that could match a good percentage of the monthly salary. Matching the full salary was too ambitious and it is in keeping with what happens when you retire from full-time work; the pension you receive will be a fraction of your salary, but it gives you a lifeline.

Building a stream of investment income does not happen overnight. It requires an initial corpus and then allocating the corpus to suitable financial products that give you the desired level and frequency of income. The allocation and avenues differ from person to person; here’s my list of 5 passive income sources. It is based on the Indian financial markets, but there are definitely equivalents in other countries.

[1] Fixed Deposits that provide monthly interest income

[2] Equity portfolio that provides dividend income

[3] Annuity that provides monthly regular income

[4] Mutual fund that provides monthly dividend income

[5] An Overdraft account to withdraw money in emergencies

Let’s explore each a bit more.

[1] Fixed Deposits that provide monthly interest income

The first step is to estimate how much is your unavoidable monthly expenses. This includes – EMI payments, non-discretionary payments like the apartment maintenance charges, electricity and water bills, mobile bill, car insurance, groceries, dry cleaning and so on. Ours being a double income home, it is only my share of expenses in the household that I need to take care of. At this point it will be good time to cut back on  any possible recurring expenses; I paid off my car loan.

Paid off my car loan before starting on the sabbatical to reduce monthly expenses
Paid off my car loan before starting on the sabbatical to reduce monthly expenses

Next step is to find the suitable monthly income source to meet these expenses. The expenses are assured and hence the income also has to match in reliability. The monthly interest income from fixed deposits is an ideal source for this. And among the two sources – banks and non-banking finance companies (NBFCs), the NBFCs offer a higher interest rate and hence I chose  HDFC Ltd – a mortgage company that also accepts fixed deposits and offers monthly interest income. The NBFCs also carry more risk, so choose carefully.

This takes care of the monthly expenses.

[2] Equity portfolio that provides dividend income

How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G Allen

A separate bank account for the discretionary expenses funded by dividends
A separate bank account for the discretionary expenses funded by dividends

The discretionary expenses are what you cut back on and spending on them depends on the availability of cash. Shopping, eating out, movie, travel, gifts etc will fall in this category. These activities are essential to add some spark and joy to daily routines and hence cannot be avoided. They can be enjoyed guilt-free, if some money is generated exclusively for them and you know you are not dipping into your non-discretionary expense payments. The first step is to have a separate bank account for this money.

I fund these from the dividend I receive from my equity portfolio. The dividends are deposited in a separate bank account. The problem with the fixed deposits is that since you take out the monthly interest, you miss out on the compounding effect and hence do not grow the principal amount. In the case of equities, even though you receive the dividend, you are not missing out on the growth in the principal amount. But the draw-back is that the dividends are not assured, plus the amount and frequency of dividend varies. But if you have a considerable equity portfolio, dividends declared annually can see you through the entire year. Am not there yet !!

Dividends are ideal for the discretionary expenses.
Dividends are ideal for the discretionary expenses.

[3] Annuity that provides monthly regular income

The third on my list of passive income sources is Annuity. It was not an option I actively sought. It was necessitated as the gratuity funds from my employer was not paid in entirety to me; instead it was set up as an annuity, with me receiving a monthly income from the corpus. I had only a say in the kind of income option I wanted. It’s a small recurring monthly income, considering my short working period. The credit arrives in the bank account every month and the best use I have found for it is to fund two saving schemes – monthly recurring deposits. Hence this income funds part of my  savings. The saving schemes will mature in a few years, providing a lump sum. Consider it a home-made bonus !! However the income from the Annuity will continue and I can start again on a new recurring deposit.

[4] Mutual fund that provides monthly dividend income

Once the expenses are taken care of, if you can find some money for investing, it’s a great bonus. This will give a momentum to the investments and in turn will boost your passive income. The dividend option from Mutual Funds is a good source for investment income. But the catch is that  a mutual fund corpus has to be created in order to reap the dividends. Mutual funds are usually used to grow a corpus in lieu for direct equity investing, but there are a few mutual funds that provide regular monthly dividends. But again the dividends are not assured, hence not a dependable source for the monthly expenses.

The money can be used to create SIPs in equity oriented mutual funds with growth option or buy more shares to grow the equity portfolio. If ever the dividend falls short, you can always cut back on the amounts being invested.

[5] An Overdraft account to withdraw money in emergencies

Then last but not least, some extra cash saved for a rainy day. An Overdraft account works perfectly for this. There are several assets that can provide an overdraft facility against them – Fixed Deposit, Gold, Shares are few examples. Instead of the standard gold loan, banks offers overdraft facility against the gold. You pay the interest only if you withdraw the funds. Loan again securities (shares) (LAS) is another easily available overdraft account. But the shares have to be of a blue-chip company.

I have only touched upon the income sources to match the expenses. There is also income tax to be considered.

But one thing is loud and clear, it is always never too early to start building up corpus to establish a passive/ second income source. Earlier the better. People have given the name gig economy to the current employment trends in the society, where the periods of work are temporary, short-term, seasonal and hence it becomes important to have income to tide over the periods of uncertainty.

Happy investing and choose wisely !!

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