Passive Income is one of the buzzwords of the last years. Everyone is talking about it. Opinions could not differ more on that topic. While there are a lot of people “praying” to built passive income streams others are doubting that passive income exists.
I am not the one to solve this. But of course I have an opinion on it. Following my blog you know that I believe in the idea of passive income. Of course passive income requieres active work and income before. But if you diversify properly, you will be able to receive passive income.
Why do we need to transform active income?
Especially 2020 showed the world how inflation is made. Europe, Germany, the US – any country being able invested that much money into their system to not crash under the circumstances. But all this money was not created by establishing any value. Therefore the amount of money rised whereas the value (like the GDP) did not. This process is called inflation. And there is nothing bad about it.
The only way to cover against inflation is to invest your money at a better rate than the inflationrate. Currently the inflationrate in Germany is at 2,5%. In the US the rate was at 5% in May as CNBC reports. So my personal task is to find investment who at least cover this rate.
One way is to invest into those companies who rise their prices according to the inflationrate. Just to give you some examples I am talking about Unilever, Colgate, Nestle and so on. The other way is to find investments who “earn” an interestrate of minimum 2,5%. Here P2P lending might be a legit idea. And all of you know that I am pretty wide invested here.
But before investing we need to earn money. Usually this come from any part of our life, where we are able to increase the value. In my case I am working to improve the logistics department of my employer and receive a salary therefore. About 20-25% of this salary is saved into two directions, ETF-shares and P2P lending.
Who does not uses his earned money to invest will not be able to cover himself against the inflation. So it is our task to transform parts of our actively earned money into investments, who will earn passive income later on.
How much money should you transform to investments?
In Germany we have the so called “Rente”. It is a pension what people are paid who became old while always paying into the pension scheme. Decades ago this system worked, but as our society is getting older and older from an average point of view those who work always to pay more to cover the costs from those already retired.
There are two ways to solve the problem. Just last week our government announced that people need to work until 68 to have enoough “insurance income” to cover the pension scheme expenses. People born in 1980 and younger should work until they are 70.
Additionally the pension income of course is not covered against inflation. If you rely on your government, you are paying for your whole life for those who already retired not being sure about your own pension income later on. Pretty reasonable -doesn’t it?
Hell no! So there is this one way to rely on those whose pension has minimum five figures called politicians or the other way and make it your own way.
Doing it the way I think is right needs you to cut your costs from the first day on and put some money into your investment fund. There is no right or wrong about the sum. Those who start early should be good with 10% and increasing it by 50% of each payrise. People like me who start later should increase the share just like they are able to. Currently I am saving about 20-25%, but the target is to save 40/50% of my income.
Think of it as a lifelong salary!
Lars wrote an interesting blogpost some weeks ago. He described how he sets up his own saving goals with an easy and simple concept: Think about what it generates you! So when you starts to invest he has the goal invest as much to generate a special sum out of it.
Example: I might invest 5.000 EUR at 12% into P2P lending and generate 600 EUR of passive income from it.
The same from a different point of view: Invest to receive 50 EUR per month of passive income!
I really like the idea, because this investment does not look like the money is gone. It is more like you create future income for yourself! With every EUR you are investing you will creating a future “salary” – for the rest of your life and beyond.
Create your own pension or addon-pension
Every month I am investing a pretty big amount into an ETF-strategy, which I already wrote about. It pays dividends of about 4,2%. For every 1.000 EUR invested I receive 42 EUR of dividend income per year – or 3,50 EUR per month. Does not seem a lot.
I am currently 40 years old. My average life expectancy as a male in Germany is 78 years. So if I had invested a 1.000 EUR today, it will pay me 38 times 3,50 EUR until I die. And after that it will pay this amount to my kids. To receive additional 50 EUR per month I need to invest about 15k into this strategy.
Adding up all of these “own-created-income-sources” you will be able to at least earn an extra-income to your pension. You do not need to compensate the 100%, because in our system it is always something on top. That feels pretty great to be honest.
Let’s calculate it: The average german employee earns about 2.000 EUR net. Saving 25% of it to invest is a total of 500 EUR every month. Assume we divide the investment by 80% for the ETF strategy and 20% into P2P lending with 4,2% and 10% interest rate. This is 2,23 EUR of passive income every month! Until I turn 68 and retire this will add up to 750 EUR per month.
Make Money to Make More Money
There is no excuse beside not taking care about your future. If you are able you might save a higher share or more in total. Usually your monthly expenses rise with your higher income, whereas it is more important to save a higher share to cover your costs.
As soon as you understand that nobody will take care of your future except you yourself, the money-game will start. The more you put in, the more will come out.
You will never receive any income without any active work. The word “passive income” is more a synonym for taking care about your money and get your money working for you. Passive income is the reward for taking the risk of investing. And to be honest: It might be a risk, but the bigger risk is rely on a system which is mathematically not possible without any losses.
This “Make Money to Make More Money”-thing is a classic quote on social media. And of course it sounds really good. But does anyone care? Is there really anyone to sit down on this and think about his own finances? I guess a lot of people don’t and this is why a lot of people have to take the risk of age poverty.
What to do: Start investing!
Personally I absolutely dislike the idea of age poverty. I do not even want to work until I am 68. My plan is to be financially free by the end of 2025. But this plan does not have to fit to anyone including its strict savings. But in my eyes it is absolutely necessary to take care about your future income.
Relying on others is the wrong option. Make it your own task – own it! Read a lot and get skilled to be able investing on your own rules and for your own goal. So whereever you are in life today you should always find a way to make saving and investing a habit. And do never stop before you reached your goal.
Active income inlcudes the part of taking care of you future life. Don’t mess it up and forget about it.
I don’t mind whether you start with investing into ETF, stocks, P2P lending or whatever. The most important thing is to start and to never stop! Especially during the first months and years it feels somehow strange, as the passive income is pretty small. No question about it. That is a time you have to get through. Someday you will recognize you were able to save maybe 1.000 EUR or your first 5.000 EUR and received your first Euros from that investment. It will motivate to stay strong and keep on.