Covid Pandemic has wreaked havoc on financial planning. Wether it’s an entrepreneur or an employee, everyone has been affected big times. One lesson has been taught to one and all that we must try and have passive income sources. Wouldn’t you agree? Ready to make more money and keep more of the money you earn? This article will help you.
As Warren Buffet famously said:
1: Pay Off Your Credit Cards
You are probably thinking, this won’t earn passive income, but you are mistaken. Maintaining revolving debt is actually passive spending, which you want to avoid like the plague.
Before considering any other investment, invest in paying off your credit card debt. Credit card debt is the most expensive debt you can carry, besides payday loans (which you should also avoid). Interest rates can be as low as 12% but as high as 22% or even 34% in a few countries! Let’s look at the numbers.
Your car breaks down and your mechanic tells you the engine overheated and seized. The cost to replace the engine is $3,000. Your car is in good shape otherwise so you decide to pay to have it fixed. You don’t have $3,000 on hand so you charge it on your credit card.
Let’s say you have an extra $250 a month you were planning on investing to make passive income. Now you have to use it to pay down your credit card debt instead. If your credit card charges 12% interest, you will pay $250 each month for 13 months to pay off this debt and you will have paid $211 in interest. At 18% interest, it will take you 14 months to pay this debt off and you will have paid $332 in interest. At 24%, you will have paid $465 in interest.
Not only is the money you pay in interest robbed from you, but your opportunity to invest that $250 each month is lost, also robbing you of the time value of that money. In other words, none of this money is working for you while you are paying this debt off, and you are paying much more than $3,000 to repair your car.
So how do you avoid having to use and then pay off credit cards? Read on.
2: Fully Fund Your Emergency Savings
Conventional wisdom dictates having six months’ worth of living expenses in a readily accessible savings account. Why?
Should you have an emergency expenditure such as the afore-mentioned car repair, or should you become temporarily unemployed or under-employed, this savings will see you through without having to resort to using credit cards. When the emergency passes, you can then rebuild your savings.
Sure, a conventional savings account does not earn much interest, something like 0.5% to 1.25% today. However, let’s look at the numbers. Let’s say you saved that extra $250 each month. Even if your account earns only 0.5% interest, in 11 months, you will have saved $3,006.87 – enough to fix your car. Once the car is fixed, you build up your savings again.
Having ready cash on hand for emergencies is a must. Pay off your credit cards and build your emergency savings before considering any other type of investment.
3: Maximize Your Pension Contributions
Once you have paid off your credit cards and built up your emergency savings, you are in a position to start making money rather than spending it. Look first to your employer-sponsored pension plan. If it is a conventional 401(k) plan, you can contribute to that with pre-tax earnings and pay income tax when you make withdrawals, ostensibly in retirement when your tax bracket is lower.
Many employers offer matching contributions to the company 401(k). Be sure to contribute up to the amount of your employer’s match. Otherwise, you are leaving free money on the table.
4: Buy Instead of Rent
You have to live somewhere, and if your job is relatively secure, you should consider purchasing property rather than renting. Why?
First, the money you pay in rent is just gone, much like the money you pay in credit card interest. It is doing nothing for you. Rents are high as of this writing (July 2021) due to the shortage in housing. Think about all of the money you are wasting by paying rent.
By buying a home rather than renting, you are investing that money in an asset that you use, which will appreciate in value over time. Also, mortgage interest is tax-deductible.
If you have a steady income, you’ve paid off your credit cards, and you have emergency savings, chances are your credit score is high enough for mortgage lenders to approve you for a loan. The amount of that loan will depend upon your earnings and the amount of your down payment.
Twenty percent of the purchase price of a home is conventional. However, if you do not have that amount, you should look into FHA loans for first-time buyers. The VA also has home loan programs requiring a lower down payment if you have served in the military.
5: Take Advantage of Virtual Investment Platforms
So, you have paid off your credit cards, saved six months’ worth of living expenses for emergencies, contribute to your retirement account, and you own your home. Now you are no longer wasting the money you earn, and you are in a position to consider investing disposable income to create passive income.
Invest in Stocks
There are many virtual investing platforms available that allow you to buy and sell stocks. Some offer robo-advising, which invests your money according to a set of preferences you dictate. Others provide education in the stock market for new investors who want to learn to invest for themselves.
Do your research if you want to invest in stocks online, as the platforms vary as to minimum contribution and fees and costs.
Become a Peer to Peer Lender
Peer-to-peer (P2P) lending is hot right now, creating as much as 2-6% returns. You will have the option of funding individual loans or investing in a bundle of loans, and you can dictate how much risk you are comfortable taking on. Riskier loans with longer terms will earn the most.
Again, many online platforms match lenders with borrowers, and they vary as to the fees and costs.
Invest in Commercial Real Estate
Commercial real estate investing is newly available to the average investor through online platforms, which allow investors to purchase shares in individual projects or bundles of projects or mortgages. Investors can expect returns of 8-12%. Real estate investment trusts (REITs) must pay at least 90% of profits to shareholders and the average annual return is 10.5%.
This article has given you a step-by-step guide to making the most of the money you earn so that you can put yourself in a position to invest disposable income and create passive income. Good luck!
About the Author
Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.