A Beginner's Guide to Passive Income-Generating Instruments

Student loans, wedding, a BTO flat, or your first car. There is a host of big-ticket items that you will likely come across in the first 10 years of your working life.  

A survey done by AXA in 2019 revealed the top two struggles that most Singaporeans face when achieving their short-term and long-term goals were “increasing cost of living” as well as being “unable to save enough money.” While this may paint a pessimistic and negative picture for many in Singapore, it doesn’t have to be.

By making some smart financial decisions, you’ll be able to relieve some burden off your shoulders. One of these solutions is to establish a secondary source of income on top of your day job, and to make sure that money you put aside have opportunities for continued growth.

What is Passive Income?

Getting an income in exchange for performing a service for businesses is considered an active income. It can be full-time, part-time or even freelance work. As long as you are exchanging your labour for payment, it is active income.

A secondary source of income is known as passive income. A passive income is derived when you are not actively involved in it, such as receiving payouts from your investment. Once set in motion, you can get money either monthly or annually depending on where you invest your money into.

How Can You Start Earning Passive Income?

There are many ways to earn a passive income. To make it easier for you, we listed out four different ways you can do this in increasing degree of risk appetite.  

1. Bonds

Bonds are generally used by governments (in Singapore, you may be familiar with Singapore Savings Bonds) and large corporations to finance and fund their own projects. So generally, you are lending your money to an institution, in exchange for a fixed interest payment.

Once maturity date has been reached, you can then collect the interest payment on them. If you do not want to hold the bond for the entire duration, you can also sell it off to a third party. You can also hold multiple bonds from different places.

Investing in bonds is generally lower risk than other investment tools, however all investments come with their fair share of risks. It is important to keep this in mind when embarking on your investing journey.

2. Exchange Traded Funds (ETF)

Exchange traded funds are investment funds that are listed on the stock exchange market. When you invest in an ETF, you are potentially investing in the various companies that are under this particular ETF.

An ETF aims to track and replicate a particular index, and thus the estimated returns would be similar to the index that it is trying to replicate. For example, if you invest in Nikko AM Singapore STI ETF, you are actually investing in SGX’s top 30 companies. This ETF also follows the Straits Times Index, which means that the performance of this ETF would be similar to the performance of STI as well.

Hence, the pros of investing in an ETF is that it gives you instant diversification and is good for people who are afraid of putting all their eggs in one basket. On the other hand, as these funds are traded on exchange, the prices of these ETF shares fluctuate frequently as well.

In general, compared to a savings or a fixed deposit account, investing in an ETF carries higher risk. However, the returns can also be greater. 

3. Stocks

Similar to REITs and ETFs, stocks are another way to earn money via stock dividends. A stock is a share in the ownership of a company. If you own a share in a company, you are called a “stockholder” and you are entitled to the company’s earnings, which is distributed via dividend payouts.

Other than dividend payouts, another way you can make money with stocks is by selling it at a higher price than you originally bought it. As stock prices fluctuate, you must ensure that you monitor these fluctuations to determine the right time to buy or sell them.

4. Retirement-focused Savings Plans

It is never too early to plan for your retirement. There are some savings products that provide fixed amounts of pay-outs after your retirement. This can help provide you with a secured stream of income to fund your retirement.

An example of a plan that you may consider is AXA Retire Happy Plus. This endowment plan offers flexible payment and pay-out options. You may choose from 9 different Selected Retirement Age, such as 50, 55, 60, and so on.

You can also choose to pay for the plan in a single premium payment or over a period of over a period between 5 to 25 years. Pay-outs are given out over 15, 20 years or up till 99 years old. There is also an inflated pay-out option to cushion against inflation, where the yearly pay-out increases by 3.5% per annum.

With flexible options and add-ons for you to consider, you can personalize your own desired retirement plan.

Earning a passive income

Having a passive income is an ideal way for you to lighten some of your financial burden, but keep in mind that you’ll need to invest a certain amount of money and time to fully reap the rewards. It is recommended to always be well-informed before making any investment decisions, or consult your financial consultant when unsure.

Disclaimer:

This article is for general information only and does not take into account the specific investment objectives, financial situation or needs of any particular person. The views expressed herein do not necessarily reflect the views of AXA Insurance Pte Ltd and should not be construed as the provision of advice or making of any recommendation. There is no intention to distribute, or offer to sell, or solicit any offer to purchase any product. We recommend that you seek the advice of a qualified financial advisory professional before making any decision to purchase an insurance or investment product. Whilst we have taken reasonable care to ensure that all information provided was obtained from reliable sources and correct at time of publishing, information may become outdated and opinions may change. We are not liable for any loss that may result from the access or use of the information herein provided.