Would you like to earn extra money with little or no effort? Does financial freedom appeal to you? Are you a human who has to pay money in exchange for goods and / or services? If you’ve answered yes to any of the questions above, then passive income is for you! Seriously though, can you imagine if someday your monthly investment income covered your monthly expenses and still continued to grow? Whether you’re just getting started out or if you’re well into your investment journey, passive income is a no-brainier for just about everyone.
If only I knew then what I know now…
It seems to me as though personal finance isn’t well taught to children, or at least it wasn’t when I was in elementary or high school. Perhaps I was disinterested in such dry subject matter and immediately purged such things from my memory. I do remember taking a high school accounting course that taught how to fill out ledgers and balance sheets but I don’t recall ever being taught about things like budgeting, RRSPs, or (shudder) property taxes. Perhaps my memory just fails me, but my point is that I wasn’t instilled with any lasting need or want to save and invest. In fact I would often hear people say something to the effect of “You’re young, you have lots of time to earn and save.” which would just reinforce to me the lack of importance of saving. In retrospect I wish I would have had a solid grasp on compound interest and been committed to saving even a small amount regularly when I was about 15 years old. If someone had told me that if I saved $20 a week until I was 65 that I would have over a quarter million dollars (at 5% interest), I probably would’ve taken money a whole lot more seriously.
You’ve piqued my (compound) interest…
In the mind of my 15-year-old self I would probably do the quick math in my head. “20 dollars a week times 52 weeks would be 1,040 dollars a year… times 50 years equals 52,000. Big whoop, some people make that much money in a year!” I can hear my younger self saying. Even if I had taken interest into account I probably would’ve thought, “At 5% interest that’s only 52 dollars per year which is 2,600 total over that 50 years”. The key thing that I didn’t know or have a good understanding of was the reinvesting of that interest and the compounding effect that it has over time. Compound interest means that any interest you earn is reinvested, and then that interest earns interest on it… and then that second interest earned is reinvested and starts earning even more interest on top, continuing to grow and build up steam over time. The longer you have that money reinvesting the bigger it will grow, meaning that taking money out or leaving money in for a few years more or less can make a big difference. Check out this compound interest calculator from the Ontario Securities Commission and experiment for yourself. Enter how much you can afford to tuck away per month and then adjust the number of years and see how big of a difference it makes. It’s pretty eye-opening if you haven’t looked at a tool like this before.
What if I’m not a spring chicken anymore?
So you’re a latecomer to investing for retirement? Don’t feel bad, you’re not alone. The important thing is that you’re able to start doing it as soon as you can. Now compound interest is our friend, but it highly correlates with how much time you have to let your money grow. So if you’re a latecomer then you obviously have less time for that compounding effect to work for you. What can you do? Well the first and most obvious option is to invest more money, more frequently to make up for lost time. Given that it’s fairly common for ones salary to increase over time given experience, hopefully you have more disposable income and are able to do just that. But what if you’re not in a position to do that?
Taking time out of the equation
We live in a world where the generally accepted methodology is that you go to work, and get paid an hourly rate for your time working. Or maybe you’re a contract worker and have negotiated the total amount you will be paid to complete a job. There’s nothing wrong with that, it’s just the norm. That standard equation means that you are only paid while you’re actively working, or until the job is done respectively. Wouldn’t it be nice if you could continue to receive payment for work that you’ve already done? Consider musicians, actors, or authors who produce a piece of work and receive royalties on that work as long as it’s still being sold. These professions may not be in your wheelhouse, but technology means that there are similar options available to each and every one of us thanks to the internet.
Online content creation is something that literally anyone can do nowadays without needing to know how to create a website, or be the neighbors whiz kid. All of the tools that you need already exist and make it easy for you to make your content available. What is all of this ‘content’ and ‘online content’ I keep rattling on about? Just about anything that you create yourself and want to share on the internet. Music, photography, artwork, books, your thoughts and opinions, videos, podcasts, a mobile app, or a website are just a few examples. Once you have created this content you can monetize it in many ways including (but not limited to) advertising, selling a product, or receiving commissions for referrals.
The main point is that you are investing some time up front to create some quality content and make it available to others on the internet, and that content will continue to exist on an ongoing basis. People who are interested in your content will continue to find it over days, weeks, months, or even years and you could continue to earn money on that same piece of content with little or no ongoing work or maintenance.
Earning recurring income for work that you’ve already done means that you’re making time much less of a factor in the amount of income that you’re able to generate. If you can successfully set yourself up in this type of situation then you can catch up if you’re behind the proverbial 8-ball when it comes to retirement savings. Even if you are young or do have a good handle on your retirement savings, this type of recurring income can significantly help you achieve financial freedom.
While I’ve conflated passive income and the importance of saving for the future to some extent, both are important and both really are for everyone. Passive income makes saving for the future easier and can take some of the burden off of you having to actively work to earn every single penny along the way. It’s for the young and old, and everyone in between. Compound interest is key given you have time, but even without a lot of time there are options out there that can help with that. Just get started as soon as you can, with whatever you can. You might be surprised how satisfying it can be saving instead of spending.