How to build a portfolio geared for passive incomes

One of the key elements in accumulating wealth and having freedom of choice is passive income. Passive income is money that you make while you’re sleeping, as distinct from active income which is made from personal effort. Passive income comes from holding investments such as property or shares as they grow and generate earnings “passively” in the background.

Passive incomes: Should you consider investing?

Over time, it is sensible to acquire multiple revenue streams. These may be a mix of active and passive. Your mix of income supports your wealth portfolio keeping it well nurtured and can also fund your lifestyle. When faced with a change in market conditions or an economic downturn, multiple income streams can help you be well prepared, as the loss of one income may be backed up by another.  

A major issue that we face as a society is the perception people have around the concept of income. Many people think that income comes from their job. Which it does, but your job is simply one active income stream. Unfortunately, our wages alone aren’t enough to pave the way to financial security.

COVID-19 has played havoc with a significant amount of people’s incomes. Having sources of passive income can prepare you for difficult times such as this. With passive income comes peace of mind. If your active income is taken away from you, passive income can ensure that you won’t find yourself in a desperate situation.

Current times have proven that a healthy wealth portfolio isn’t just something we should have in place purely for our retirement years. Your portfolio may need to be carried with you throughout your life and constantly monitored to ensure it is performing at maximum capacity.

A wealth portfolio can help enhance your quality of life ahead of retirement as it may presents you with ‘spare cash’ as separate to ‘necessary cash’. This can help to reduce financial burden and stress. When your active income stops (i.e. your job) your wealth portfolio can still provide. Finally, when you are gone, your wealth portfolio can live on, leaving a lasting legacy for your family.

Before you start building a passive income

For better or worse, you need to know where you stand with your finances before you can move forward on your path to wealth creation. Your accountant or wealth advisor also needs to know your current position to work effectively with you on establishing and growing your wealth.  

The way I see it is pure logic – you need to treat your personal finances the same way you would a business. Money comes in and money goes out. What is left over is profit or loss, alternatively in a personal sense, surplus or deficit.

When it comes to fast-tracking wealth, and remember there is no ‘get-rich-quick’ formula, you should start with understanding the numbers. The secret formula to growing wealth is often in your numbers. Think of your lifestyle in terms of numbers, how much do you need now and for the future. 

What is your passive income strategy?

Wealth building to some extent is goal-based. You may want to start by identifying your goals. Those things in life that you really need and want. A wealth strategy is how you are going to reach each goal. It’s a roadmap. The plan that you implement to achieve your goal. A typical healthy wealth portfolio that is focused on creating income, holds your combined assets, often a mix of investment types, and is nurtured to provide financial security, plus support and enhance your lifestyle.

Remember the adage: Prior Preparation Prevents Poor Performance? A lot of people may overextend because they don’t look at their numbers in the first place, leading them to make really crazy, misinformed decisions. They may end up ‘flying blind’ with their money. 

We often see people who receive an inheritance or a gain where they have sold their family home to access cash from equity growth, and make some serious mistakes with large sums of money. They act on a whim without obtaining advice and it can set them right back. The money disappears as quickly as it comes in on all the wrong things. We also see those whose wealth strategy is to simply do nothing, relying on an inheritance, which is money that may never come.

The key is to be constantly nurturing your wealth profile, monitoring, building, protecting, fixing, improving. Your wealth portfolio brings financial security, enhances quality of life, and peace of mind in uncertain times.

You need to be disciplined in your approach, be very clear on your personal goals. If your goal is simply to save money, it is unlikely you will achieve it. It’s not enough. Your goals need to be the things in life that you want so much, that there is not a lot that will stand in the way of you achieving them. That’s how badly you want to achieve them.  

Here are a few suggestions of things that you can do to practise discipline around saving and growing wealth:

  • Start a personal wealth accounting file
  • Creatively add or improve income streams, active and passive
  • Understand your annual cost of living, and shave unnecessary spend
  • Divert surplus to savings on the day your income arrives in the bank
  • Identify your personal goals, and break them down into mini goals
  • Apply your savings strategy to achieving each mini goal

In this country, debt is very accessible. And not just in the form of bank loans, all kinds of debt: Afterpay, credit cards, vehicle finance. Any debt that is used to fund a lifestyle where you don’t have the cash available to buy something at the time is likely to hold you back when it comes to accumulating wealth. 

It will be pretty tricky to get ahead of the game when you rely on debt funding your lifestyle. However, taking on debt to acquire a home is often an exception. Because a home will hopefully appreciate in value, as opposed to assets that depreciate in value, such as vehicles and the like. 

Investing in property for a passive income

Investing in property may bring some benefits to your wealth portfolio: capital growth, rental returns and tax breaks. But bear in mind, that relying on investments with high rental yields and the tax savings you may make, alone is probably not ideal. If the property isn’t going to go up in value, it’s is likely to be a high-risk wealth strategy. 

There are some rules of thumb to consider when investing in property:

  • Make sure you understand your numbers, know where you’re at before you do anything
  • It’s probably a good idea to reach out to your accountant or wealth advisor for advice
  • Do your own research thoroughly rather than relying on ‘word on the street’ or the opinions of others
  • Keep in mind, that the value of property is often in the land, not the building.
  • Investment properties that tend to perform well are where the purchase price is right, the buyer doesn’t overextend, the property is freestanding and in a location that offers adequate employment, industry and infrastructure. Aged cottages on nice sizeable flat blocks, low maintenance in a location that has everything to offer, are a favourite. A cosmetic lift can go a long way with these kinds of additions, with the long term option of development/rebuild
  • When you invest in property you often need to have patience to allow your investments time to grow to avoid losses and achieve the best results.

Investing in shares for a passive income

Advisors will say that it makes sense to diversify. To have a mix of investment types, shares and property, residential and commercial, for example. The same applies no matter what the investment type. Investment options for your funds in super are generally limited to the share market, unless you hold a self-managed super fund.

Shares are more easily traded than property and are an alternative if you don’t want to lock funds up in property, being mindful however that often the same long-term commitment is required for best results. 

Depending of course on your risk preference, the areas where we see the most returns through share portfolios are once again strong stable investments that tend to withstand times of market instability and present gradual growth over time. Market falls may present an opportunity to buy-in. Startups often surprise, but these carry high risk.

It’s important to remember that there are risks involved in investing in the share market and investing in property, you should always thoroughly research your options and consider you risk tolerance and current circumstances. If ever in doubt, you may want to seek the advice of a financial planner before making any decisions.

If you’re comparing Online Share Trading companies, the comparison table below displays some of the companies available on Canstar’s database with links to the company’s website. The information displayed is based on an average of 6 trades per month. Please note the table is sorted by Star Rating (highest to lowest) followed by provider name (alphabetical). Use Canstar’s Online Share Trading comparison selector to view a wider range of Online Share Trading companies.

This article was reviewed by our Content Producer Isabella Shoard before it was published as part of our fact-checking process.

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Leah Oliver

Leah is a qualified Chartered Accountant, Registered Tax Agent and Public Practitioner, with extensive experience in accounting and finance, from both a chartered and commercial background.  In addition to this, Leah is a wealth educator, putting you, as an individual on the right path to invest wisely. Building a smart wealth portfolio is what Leah wants to teach people. She is the founder of Minnik Chartered Accountants.

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