Friday, January 13, 2012

Passive Income

Passive income as a concept is easy to understand – “it means getting a cash inflow every month without working for it” - passive income unlike active income does not depend on your effort –we all work for 8 hours or more a day - for 25 days a month and then we get a salary cheque – passive income comes every month without your working for it - a good example is rental income  - the rental cheque comes every month whether you are going to office or not.

Now imagine if your monthly living expense is Rs 50,000 and your monthly passive income is also Rs 50,000.

Wouldn’t that be an ideal situation? I am sure you’ll agree that this is a good situation to have.

So what does it take to reach this stage?

It takes a bit of planning, smart investing and about ten years of time in Indian conditions - that’s all.

Let me repeat this – In India, if you plan your finances well and invest smartly and keep at it for 10 years consistently – you will reach the stage where your passive income is equal to your monthly expenses.

There was this couple in their 40’s –they had invested smartly and bought a plot of land in a well known part of Delhi a decade earlier and over time, they had built a three floor residence. As the house was on a main road, they also built a few shops. By giving two of the floors and the shops on rent, they earned more than enough passive income to lead a comfortable life.  The story does not end there. The husband was an engineer and had a regular job - ever since this rental income started flowing in – his performance in the job shot up – he realised that he was stress free – he was more cheerful  - this was because, like most people, he was also fearful of a job loss and that created stress and performance issues which vanished once the rental income came and he was financially free.



Another friend had a great idea – he had worked for a few years in the US and had saved in USD – as he came back to India, he had savings of about 120 lacs in INR. He invested Rs 10 lacs in yearly FD @ 10%  which gave him an interest earning of 1 lac – and he figured out that after 12 months and 12 such FD’s he will get Rs 1 lac every month as interest which will easily meet his monthly expenses. All he needed was to reinvest the principle amount of Rs 10 lac every month in a FD @ 10% and use the interest earned.

How does that look?

Looks good?

Well not very good actually.

You see India has an inflation of about 8- 10% and this scheme of rotating FD’s means that his interest income will stay at Rs 1 lac per month for ever – over a few years, the purchasing power of this 1 lac would go down due to inflation and then he will need a higher passive income –or he will feel poorer.

We all know the salaries of our parents - in 1970s or 1980’s or 90’s  - the salaries in the 70’s were something like Rs 1000 per month –in the 80’s a good government job paid about Rs 2500 per month – in the 90’s a similar job came with a Rs 10,000 pay cheque – today the salaries are about Rs 40000 per month for a manager’s job – this increase is not because of living standards – it  is because of inflation.

Even government pensions are adjusted for inflation every now and then.

So in the long run, one needs to have a passive income that goes up at least as much as inflation – otherwise, we will become poorer over time.

Having enough passive income does not mean that you will retire early – it just means that you can chose to do what you want – you do not have to take up a job because of the salary – you can chose a job because you like the role. I teach as a visiting faculty and I left my high paying job – because I love to teach and because I can afford not to look at the salary difference between a corporate job and a teacher’s job –thanks to my passive income.

Now that we have understood the concept of passive income and would love to have it, you may be wondering whether it is possible.

The answer is that there are ways to achieve it – many people have achieved it – those who have achieved it may not talk about it openly– such people are all around you – just observe – you will generally find them less stressed, more cheerful, friendlier, and more helpful and generally they would contribute more than their fair share towards society.

In my forthcoming book, you will find ideas for passive income that will set you thinking. it will hopefully help you make a long term plan which will take you towards getting enough inflation proof passive income to meet your expenses through out your life.

14 comments:

  1. Eagerly awaiting for the release of your Book . All the very best Sir .

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  2. Interesting & easy read...easy to understand by everyone...
    If this is the way book flows with practical advice, it's definitely going to be very successful :)
    All the best, Raja !

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  3. Bang on Target.... Waiting for more to know for earning passive income :)

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    1. Thanks Angad - there is no magic here -you know most of what I want to write :-)

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  4. Sir,before all, please accept my belated New Year greetings.
    Now coming to your book...I had always wondered why you never thought of putting your opinion in black and white? Anyway, better late than never.

    An honest feedback, Sir-the good thing about your writing style is that it's always on a conversation mode. It's a common man's lingo. A common man doesn't understand repo and reverse repo rates. But s/he very well understands inflation. I am guessing that your book would be targeting the middle management and early executives. A suggestion: please include more examples (like the ones you used above). They make an even more interesting read, because it makes it easier to visualize/imagine.

    Good luck, Sir. Looking forward read the entire book.

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    1. Thanks for your feedback - the book is meant for someone aged 20 till 45 - someone who reads books- someone earning above 5 lacs per annum - I surely want to make it as easy to read as possible and I take your feedback that it needs to be as much examples as possible.

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  5. It's just a glimpse of your book and it is already looking fabulous. I'm eagerly waiting for your book sir.All the best. Hope to see it soon.

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  6. Sir, the concept may be known to us but yes sharing these thoughts refurbishes the thought in our minds. Thanks for sharing again. But I would also request you if this article could be linked up with the planning part as well. I am sure the ideas section will cover it up. Eagerly waiting for it.

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    1. Sandeep -the book consists of about 25 chapters - each chapter is about 2-5 pages long - this blog is one of the chapters - obviously the financial planning is another chapter - I am currently writing that.

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  7. Hi Sir ! Loved this chapter, and I remember these examples you hav given. The writing style is simple and effective- it immediately sets you thinking. I also really liked a small diagram you had shared with us in WM class, about financial independence. It indicates how assets generate income for expenses. I dont know if you are intending on including it elsewhere, but I feel it may also fit in this chapter well. Looking forward to reading more :)

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  8. While reading i can recall our class discussions..and it feels more like a conversation which u r sharing..1 can read it without loosin focus...very smooth and crisp.

    All the best Sir.

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