The Power of Passive Income

Most citizens earn their bread and butter by doing a 9-5 job and getting a salary at the end of the month. Such earnings are often called linear income . The income you generate is a function of the time you invest in the job. If you cannot work, you will not earn. And earnings from salary is never enough.

. Look at this very simplistic equation encapsulating linear income: Earnings = Rate per hour * Number of hours.

There are a couple of limitations to this type of income:

Your earnings are limited to the number of hours that you can invest. You have 24 hours a day

There is always a limit to the rate

Once you retire or fall sick and cannot work, your “Number of hours” in the equation will become zero and so will your earnings

Most of us do not have a luxury of a pension plan to see us through our retired life

To avoid this situation, we must all start looking for other sources of income. I am not going to suggest a business because most of us do not have access to finance, and we are risk averse.

. I am suggesting that we seriously looking into the possibilities of investment. Investment income is not a linear income as this income is not directly related to the time you spend. Keeping your money in the bank in a long-term deposit, for example, will earn you money by way of interest even if you are unwell and staying at home or you have retired from work.

. Keeping money in the bank is one such example. There are many such avenues which an ordinary citizen can take recourse to supplement his/her income. A lot of studies have shown that if investment is made based on a learned decision, the investment income gives a handsome return. It not only beats the inflation, but it also sees you through rainy days. I am not penning this article to advise you where to invest but rather to make you aware that this is a very good vehicle for ordinary citizens like us to have a serious look.

. I would also like to introduce at this juncture one fundamental concept of investing: the power of compounding. The income that you will get through investment will usually follow the rules of compounding. If you invest in a principle of USD 1000, this will earn interest at the end of the first year, say USD 50 at 5%, and the next year the corpus becomes USD 1050. At the end of the second year, you will earn USD 52.50 and it goes on the increase. Mr. Warren Buffet, who is recognized as one of the largest and successful investors in the world explains the benefits of compounding in this video.

investorshttps://www.youtube.com/watch?v=wBcGTc4MPG0

. There are many countries in the world where there is a very vibrant market to invest in. The stock markets are the most prominent amongst them. Within the investment eco-system, there are many instruments in which the ordinary citizen can put in their money. One of them are mutual funds. Investing in the stock market may seem to be risky for some of us. Through mutual funds, you give your investable funds to an expert, who for a small fee, will prudently invest your money and more often than not give you good returns.

. I would like to add some points of advice and caution at this juncture

Always take the advice of an expert while you invest in the stock market

There are some safe investments and there are some investments which are risky but give higher returns. The trick is to strike the balance

It is always good to start when you are young, and the investment has to be long-term. It does not matter if the investment is small. Remember the power of compounding

Be a disciplined investor and invest regularly. That is when the returns are at their best

The purpose of this article is to create an interest in investing. Seek expert advice before making the investment.

. Life is all about planning. There is a saying: if you fail to plan, you are planning to fail. My suggestion is to start prudent investment very young in life and be a disciplined investor. It is only through such planned investment and relying on “passive income” that we can secure our future.

The Power of Passive Income

Shivajyoti Pal

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