About Passive Income and Having Positive Cashflow

In my previous article, I mentioned income from salary forms my basic source of income for my investments.

This is known as ‘active income’. In other words, I’m exchanging my time for money.

So what happens if I stopped working? Yes, I have no more income.

In the above scenario, when there is no more income, but my bills still have to be paid, the notion of financial freedom cannot materialize, agree? This is because I’ll be too busy worrying about bringing food to the table, paying for my instalments, worrying about the lack of money, how can I be (financially) freed?

Therefore, a more important money concept is ‘passive income’, if one aspires to achieve financial freedom. This means my money is still making me money even though I may be sleeping.

There are more than one way to have passive income, some commonly known examples of passive income are rental and dividends. My personal belief is that there is no one size that fits all when it comes to money and investments. Some people are willing to take more risks in exchange for higher returns some people may not prefer this. Some works better some people, some may not.

If you are very new to this concept, at this stage you may be wondering ‘I’ve only just managed to grasp the concept of passive income, I think I understand what passive income is about but how do I can get started?’.

First, you need to be aware of your financial situation.

Before I share the steps to determine your financial situation, I need you to fully understand the following financial equation,

Financial Freedom = Positive Cashflow 

                                  = Income  > Expenses

The concept of positive cashflow is also very important here because anytime it is a negative cashflow, the Financial Freedom will no longer be there.

Now, let’s go the steps.

1) You need to be aware and calculate of your monthly expenses. Do you know how much you need to spend every month in order to survive?

If you haven’t done this exercise before, don’t worry. I know many people have never done this exercise before too. It’s not too late to start knowing now.

2) How much income do you get from your investments monthly? For example, rental.

Then, take 2) – 1) and if your answer is positive, very good! You have a positive cashflow every month. You probably need to just be on the lookout to protect the capital nest that you have already built up and ensuring that the income cashflow stays positive.

Well, if it’s negative cashflow, don’t feel discouraged, save and invest more!

Go back to 1) and see how you can reduce unnecessary expenses.

*Cutting back on expenses doesn’t mean you have to cut back on your lifestyle, unless you are doing a radical change.

And read my previous post on whether your investments are getting you the type of investment returns that you want to boost your income!

Remember to constantly plan and review your portfolio to ensure that you are getting the kind of returns that you want from your investments.

 

This would help to speed up your goal of achieving financial freedom sooner.

And if your current income is active, try to convert them into passive!

Also, ‘passive income’ is not to be confused with ‘returns on investments’.

Returns on investments could be through capital appreciation or through returns such as dividends and rental or both.

But when it comes to passive income, we do not consider capital appreciation in the equation. Capital appreciation is a bonus but it is not passive income because it doesn’t quite help you in your cashflow, not directly anyway until you decide to cash out on the capital gains and reinvest into something that will generate cashflow for you.

When you have decided that you want to increase your passive income to get positive cashflow, the types of investments that you’ll invest in will follow this same ideaology. This is what I mean by the investments fitting one’s lifestyle and requirements.