Clever Ways To Make Your Money Work

The rising cost of living is challenging people to find additional sources of income to cover their everyday expenses, including food, fuel and energy costs. Generating passive income is just one strategy to boost earnings without having to take on another job.

Passive income is money you make with minimal time and effort. It is when your money or your assets effectively work on your behalf to boost your income. If you have a lump sum that you aren’t sure what to do with, finding a way to turn it into a passive income can help your money work harder and improve your financial resilience.

Here are some ways to earn passive income:

Dividend Paying Stocks

Investing in dividend paying stocks you become a shareholder of a company and are entitled to dividend payments. Dividends aren’t guaranteed, but they can provide a good source of passive income if you have the right shares in your portfolio.

Some guidelines for investing in stocks for a dividend is investing in companies that have a proven track record of providing a good return. Check to see if dividends from the company have been growing over time.

Advantages of investing in stocks as a source of passive income include:

Potential for a steady income stream
Some protection from stock market fluctuations.
A long-term source of income.

However, there are also disadvantages that every investor should be aware of. These include:

Share prices may decline
Tax of dividends may increase
There is less appreciation than with growth stocks

Exchange Traded Funds (ETF’s)

Another option to consider is investing in exchange traded funds (ETFs). ETFs combine the advantages of stocks, bonds, and mutual funds while giving you access to a wider selection of investments at lower expense ratios. Additionally, they can be purchased or sold at any time.

Advantages

Able to diversify your portfolio to track a wider range of stocks, or even attempt to mimic the returns of a country or a group of countries.
Lower expense ratios
ETFs tend to realise fewer capital gains than actively managed funds

Disadvantages:

Over-diversification as ETFs are generally not actively managed, but are set up to track a specific index.
Lack of liquidity hinders transactions
Some knowledge is needed

Buy-To-Let Property

Investing in property is considered one of the best ways to secure a passive income stream. Even though it requires the biggest financial investment and commitment, investing in buy-to-let property can generate significant levels of passive income and, as an added bonus, you have an asset at the end.

Advantages of buying a property and renting it out include:

Provides a steady income stream
Potential house price growth
Rent price can fluctuate with inflation, meaning no diminishing returns

Disadvantages are:

Landlords are liable for income tax, stamp duty and capital gains tax
Responsibility for maintaining the property
Finding tenants

Savings Account

Allowing your money to earn interest in a high-interest savings account is one of the simplest methods to make it work for you. More incentives to maintain money in a bank are provided by these kinds of accounts. It’s a long-term investment that can take a year or two to start paying off, but over time it can be a very wise one, making it a very low-risk way to make residual income.

So What Is Next?

As with any investment, you should think about the product’s level of risk and your ability to withstand losses. Unless you hold investments in a tax-efficient vehicle like an ISA, income tax will often be due on passive income.

Passive income is still income and you will need to pay tax on anything you earn above the tax-free amount. Speak to your financial adviser to ensure you enjoy the benefits of earning passive income while ensuring your tax liability is covered.

Written by: Kariemah Boltman

23 September 2022