Today, almost anyone can invest money to generate income. You don’t have to have a lot of money to do this, although some areas of investment require a lot of start-up capital.
What is passive income
Passive income is characterized by the fact that you do not need to perform any regular active actions to receive it. If you work in the office, run your business or trade on the stock exchange, it is an active income, and in the current situation is very unpredictable. And if you invest in real estate or investment products, you can earn without constant effort.
The main advantage of passive income: you do not need to waste your time and nerves, the invested money works for you. Often this also includes “compound interest”: the more you have earned, the higher in the future the profit will be. Thanks to this capital will grow exponentially.
There is a widespread belief that in order to make a passive income you must have significant initial funds. In reality, you can start investing money with very small amounts.
Types of investments
There are many options for gaining passive income. Among them there are both very common and as yet little-known, but promising.
Types of investments differ on set of parameters: profitability, a degree of risk, liquidity, the necessary size of the capital (an entrance threshold), term of returning of the starting capital. Some are appropriate to use only when investing for a few years. Others are capable of generating a profit after only a few months.
Let us consider the most interesting investment instruments and briefly describe their main features.
Bank deposits
The easiest way to invest money is to open a bank deposit. The investment term can be any – from 3 months to 3 years.
The disadvantage of this investment tool is that the bank interest is usually lower than the rate of inflation. Now deposit rates are at 10-11% per annum and continue to fall, and only according to official data, inflation in 2022 will be more than 17% per annum. Therefore, when investing money in the bank, you are essentially losing your capital.
Gold or other precious metals
Gold has always been a protective financial instrument and its price is subject to weak fluctuations. Gold rises in value during financial crises and falls during periods of calm.
You can invest in gold either physically, buying gold bullion, or by opening a metal account in a bank.
Although in 2022 they abolished VAT on the sale of gold bars, there remains a significant drawback to buying them – you have to bear the costs of storing the gold bar. If it is damaged, you will only be able to sell it at a discount.
When opening a metal account, the risks inherent in a bank deposit are preserved, and the yield is lower than a bank deposit.
Investments in gold or other precious metals such as silver, platinum or palladium are suitable for investors who want to preserve their capital in times of financial instability, rather than make money. For example, the price of gold and precious metals rose sharply at the beginning of spring 2022, but within a month they had not only recovered, but declined relative to the beginning of the year.
Investing in real estate for resale
Another defensive tool is buying real estate for resale. You can buy an apartment in a building under construction and sell it at a higher price a year or two later. Real estate prices are steadily rising, significantly ahead of inflation. Even after the fall in times of financial instability, apartment prices recover quickly and continue their growth.
Despite the high reliability and profitability of such investments, this type of investment has a serious disadvantage – in order to sell your investment apartment, you need to wait until the developer will sell all of his apartments or offer a substantial discount from his prices. After all, any buyer will first of all go to the office of the developer to buy an apartment, rather than from a private person.
Renting out the property
Investing in real estate has always been considered very promising and reliable. Residential and commercial properties are steadily increasing in value over the long term, not sagging too much even during major financial crises.
In 2018, rental housing yielded an average of 8.2 percent annually, and in 2019 it averaged 7.8 percent. In 2021, rental values sagged even more.
Investments in commercial real estate look more promising, especially in good demand locations. In 2022, however, the demand for commercial real estate rents fell dramatically, which caused a drop in the return on investment. In addition, the entry threshold here is very high. To acquire perspective objects will require significant amounts of money that are inaccessible to most private investors.
You can also rent out other property. For example, expensive tools, equipment, machinery.
Insurance investment
Investment life insurance programs are characterized by reliable protection of invested funds and a number of additional features.
Let us highlight the main advantages of insurance investment products:
- High reliability, guaranteed protection of invested funds from loss and losses.
- Targeted protection of the capital, excluding the possibility of its arrest, confiscation or division at property disputes.
- Preferential taxation.
- Opportunity to use refund thanks to tax deductions.
- Additional financial protection for your loved ones with the help of insurance.
- Flexibility in the programs offered (with a guaranteed income or with the dependence of income on the chosen investment strategy).
All insurance investment programs can be divided into two main groups:
- low, but guaranteed income;
- high potential income, the receipt of which is not guaranteed, and full capital protection.
In the first case, the client is guaranteed income at the level of government bonds, which is much higher than bank deposit interests, with a level of reliability comparable to that of banks.
In the second case, the client is guaranteed one hundred percent return of the invested funds. One part is invested in reliable instruments with a guaranteed return (for example, federal loan bonds), the other part in high-yield assets (corporate bonds and stocks). At the end of the investment term, the contribution is refunded plus the income earned during that time.
The term of insurance investment programs usually starts at 3 years.
Investment strategies can also be different: government bonds, indexes of leading investment funds or shares of major corporations.
Among the most important advantages of both programs – an absolute level of reliability with sufficiently high returns, full protection of capital (financial, legal, insurance), preferential taxation and the ability to use the tax deduction for the program term of 5 years or more.
The disadvantage of this type of investment is a low yield at the level of inflation. Investment insurance programs are more suitable for people whose goal is capital preservation.
Investments in cryptocurrency
In 2020 and 2021, most cryptocurrencies rose in value. The most important digital currency, bitcoin, made a particularly sharp jump in 2020. After a period of lull, bitcoin showed rapid growth. During several months, the currency “jumped” from the range of $10,000 to $45,000 to $55,000.
Such a rapid growth caused a very big stir. Not only private investors, but also hedge-funds and even large corporations began to actively invest in cryptocurrencies. As a typical example, Ilon Musk’s company Tesla earned more from the growth of bitcoin in a month than from the sales of its cars for the entire year 2021.
At first glance, investments in cryptocurrencies look very promising. However, it is worth taking a look at the historical bitcoin chart. On it, we will see some of the currency’s biggest declines. The last one happened after a frenzy of growth in 2017, when bitcoin rose about 20 times, and then collapsed sharply. A lot of private investors lost their money then.
In 2022, there was another drop in the value of cryptocurrencies, including those that were pegged to the dollar, such as LUNA.
So investing in cryptocurrencies should be very careful. If you plan to make a profit within a year or a few months, it is very risky. After all, any sharp growth is sure to be followed by a pullback.
On medium-term investment horizons, the prospects of several leading cryptocurrencies look very positive. However, the degree of risk in this segment is still very high.
Trust management
One common way to generate passive income is to put your funds or assets under trust management. There are various forms of such transfer.
- Real estate trust management. This option is suitable for owners of a wide variety of properties (apartments, private homes, office space, retail or business centers, etc.). After signing the appropriate contract and your property will be managed by the selected company. You will receive the agreed income, and the company – to pay all current bills, rent the premises and perform the necessary operational activities.
- Asset management. The investor enters into an agreement with an investment company, which invests its funds in promising financial instruments. The level of risk, portfolio strategy (approximate percentage of shares, bonds, derivatives, etc.), and the amount of commission are agreed upon.
- Advantages include no need to be personally engaged in capital or property management, potentially high income. The disadvantages are high commissions, no guarantee of income. You will have to pay a commission even if your performance is negative.
- Investments in mutual funds. This option is similar to the previous one. The difference is that it accumulates the funds of many investors. The management company invests the money in promising assets. Often, the investment strategy of the fund is predetermined. For example, index funds clearly replicate the indices they track.
- The disadvantages and advantages in this case are similar to the previous point. Although the degree of risk is often lower for index funds.
- Investments in PAMM accounts. This is the most risky variant of trust management of capitals. Funds are invested in the accounts under the management of professional traders. It is possible to receive very high incomes – up to 100% per annum and even higher, but the risk level is also very high. The manager of the account does not bear any responsibility for the capitals managed by him, while receiving a significant commission.
Using cashback accounts
One of the ways to get income available to absolutely everyone – from students to retirees. The easiest way to get cashbacks is to use your regular payroll card or any other card. The card can be a credit or debit card – it does not matter.
Each bank has its own cashback policy with different deductions. Often there are special card products with an increased level of payments. On average, you can count on a return of 1-3% of the purchase price, and for a number of items – up to 10-20%. During various promotional campaigns, cashback can be even higher.
There are many sites online that track such promotions and offer favorable cashback terms. Widely used by their large retail chains. There are also special mobile applications that you can put on your smartphone and keep track of favorable current offers.
Accrued cashbacks can be immediately transferred to savings accounts. In this way, you will earn additional income.
Investing in shares
Shares are a classic investment instrument. You should distinguish medium-term and long-term investments in the securities of companies with speculative trading on the stock exchange. Trading presupposes the receipt of active income with high risk level. Buying shares “in the long term” is an investment with the expectation of receiving a passive income.
To buy shares, you need to conclude a contract with a broker. Today, this process is greatly simplified. Thanks to the proliferation of mobile apps, buying stocks is becoming widely available. There is a danger in this – inexperienced investors may take the choice of assets they purchase lightly and incur serious losses.
The process of investing in stocks requires a serious approach. One must study the market, be able to determine promising and undervalued securities. To reduce the level of risk, it is advisable to diversify as much as possible.
When buying stocks, there are several different approaches. Many experts advise building a balanced portfolio, in which bonds will occupy a part, and shares of reliable companies (corporations like Gazprom or Sberbank, large transnational companies) will take a part. And only a small part of the portfolio may be invested in risky projects with potentially high yields.
However, the experience of 2022 shows that this market is very unstable during political turmoil – literally within a few months portfolios of investors decreased by 30-50% due to the fall of the share value, and some investors’ equity investments were frozen for an indefinite period of time.
Affiliate programs
This method is good for the owners of their sites – online stores, online casinos, blogs, popular pages in social networks. You can put a link to the selected affiliate program directly in the text of the article. For each transition or registration, you will be paid a certain amount.
There are a huge number of such programs with different conditions and levels of payment. Owners of promoted pages or sites can receive income for the posts about a product (goods, services, brands), also for attracting new customers – such a system is widespread in the first place in online casino, but other areas also picked up such a system.
To select an affiliate program is convenient to use special services-aggregators, which contain links to hundreds and thousands of potential contractors and advertisers.
You can put your own links not only on their own pages, but also on forums, review sites and other resources.
Startups
An interesting option for gaining passive income is investing your money in an existing business project or startup. Nowadays, new software products, including applications for smartphones or games, appear almost daily.
The development of a simple mobile application takes from several months to a year. Therefore, investments in this sphere allow obtaining a stable passive income rather quickly.
If the product under development “fires”, the profits can be very high. However, the risks are just as high here. In the worst case, the program may not start at all, and in the best case, it may bring very little income.