So how do you start to acquire passive income? Many people in employment (and more now with the Government's pensions auto enrolment initiative) will be putting funds aside into a pension. For most, that, along with the State Pension will be their passive income in retirement.
But what about passive income before retirement age? How can we start to build up investments which generate income whilst we are still young enough to enjoy it?
I like George S Clason's book, 'The Richest Man in Babylon'. It's full of tips about thrift and personal financial management purportedly based on the wisdom of the ancient Babylonians. Two tips which have stuck with me are (and I might be paraphrasing here), 'Pay yourself first' and 'Save 10% of what you earn'.
'Pay yourself first' means that you put some money aside for investment before you start paying the household bills etc. That is top of the list and gets done every month. What's left is to live on. 10% is his suggested minimum for setting aside. This is easy to say and much harder to do, particularly if finances are tight. His point is that 10% of even a small amount will not be missed and over time will accumulate if invested wisely.
So let's look at someone earning £30,000 after tax, or £2,500 per month. Paying themselves 10% before they do anything else would generate £3,000 over a year or £250 per month . Within a few years this could build up to a sizeable pot. Let's be clear this is not for a holiday or to put towards a new car. This is for investment, to generate a passive income. Sure, the £250 will be missed but Clason's point is it will not be missed as much as we think. Most people will adapt and reduce their discretionary spending.
What to invest in is a separate question and will depend on a number of things. There are lots of tax incentives for some investments in the form of ISAs, LISAs, Help to Buy ISAs etc. Clason suggests taking some time and doing some research to find the right investment for you. An Independent Financial Advisor can help devise an investment strategy suited to an individual's goals and attitude to risk.
Generating a passive income stream is not easy. It takes discipline and sacrifice but it can reap significant rewards and potential escape from the drudgery of work. Starting early is key so take a tip from the Babylonians and 'Make thy gold multiply'.
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