Your First Passive Earnings: How Should You Spend it?
Being a corporate slave can only take you so far. If you want to be rich and live a life of travel and luxury, earning passive income is key. It makes money work for you instead of the other way around. A business is one example of a passive income source. As your boss, you can delegate your tasks and enjoy more free time. As such, you can keep earning money even while you sleep.
For that reason, a passive income is one of the biggest signs of financial independence. However, working with it can be a bit tricky. When you finally get your hands on your first earnings, you might be torn between treating yourself and investing yet again. To know which direction to take, let’s delve a bit deeper into passive income.
Understanding Passive Income
To define it more clearly, passive income is money earned from rental property, limited partnership, or other business in which you’re not actively involved, such as when you act as a silent investor. Income earned from the investment fund, stocks, and money market funds also count as passive income, but they are categorized as portfolio income.
Over the years, passive income has been regarded as money earned regularly with little to no effort. But the IRS in the U.S. has technically defined it as “net rental income” or “income from a business wherein the taxpayer doesn’t materially participate.” Similarly, the Philippines regards passive income as “money earned without exchange of labor and time.” So if you run a Philippine business, you need to have an employee or manager who does all the work for you. Otherwise, you’re earning an active income.
You’re free to enjoy your passive income as you would like. But since the goal of earning passive income is to grow it over time, you should still observe some reservations when spending it. Earning passive income isn’t an excuse to spend extravagantly, without restraint.
Ways to Spend Your First Passive Earnings
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Real Estate
Since this is your first earnings, let’s take the practical route first. Consider investing a sum in real estate, be it your existing rental property or a new one. Rental properties are always a top choice for seasoned investors. It allows them to maintain a stable income stream even during a recession.
If you want to focus on your existing rental property, you can make improvements to boost its value. But note that the improvements may affect the rental cost, which may dismay your tenants. If that’s a risk you can’t take, focus on repairs instead. Maybe some light fixtures need replacements, or the floorboards in some areas have already cracked or loosened.
You can also look into real estate investment trusts (REITs). It’s relatively new security in the Philippines. They’re actually companies that invest in income-generating properties then distribute the dividends to shareholders. So it’s similar to managing a rental property, but someone else manages it for you, and you only get the money.
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A New Business
You can either start a new business or help fund a startup. Many new entrepreneurs conduct crowdfunding, a method of looking for investors who would finance their business idea. They do it through social media or crowdfunding sites.
When you finance a startup, you can earn a percentage of the business’s profit as long as you won’t participate in the business operations. If you took a role in the business, your income would be recognized as active income because you provided “material participation.”
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Fun
If you’ve wanted to travel, renovate your home, or buy yourself the latest car or gadget, allow yourself that luxury. What’s important is that your earnings won’t completely run out after the purchase. Apply the 80/20 windfall rule, in which you’d spend only 20% of your earnings and save the remaining 80%.
You can also treat your loved ones, but set some limits on this. Taking them on vacation or buying them gifts is okay. But sustaining their lifestyle may not be the smartest idea unless you’re the head of the family.
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Your Goals
Maybe you want to buy a house, pursue higher education, or get married. Whatever your goal is, set aside a portion of your earnings for them. Budget it wisely because spending for a major life milestone often includes hidden costs.
When you start investing in a passive income source, note that it takes time for the returns to yield. You may have to wait years. So be patient and have another source of income as you wait for your passive earnings. In time, you can live a life of comfort and security and keep earning money.