Thanks to the cost-of-living crisis, some folk now have a second job, side hustle or other way to generate extra earnings. For example, renting out a room, parking space or driveway seems popular around my way. My solution is to make my money work harder for me by generating extra passive income.
Powerful passive income
The problem with passive income is that some earnings are a lot less ‘passive’ than others.
For example, I could become a buy-to-let (BTL) landlord, renting out property to tenants. But my life experience has shown how tricky and involved this can be. At the very least, I’d have to maintain and repair another property, as well as my family home. Therefore, BTL investing really isn’t for me.
Another option people pursue is blogging, vlogging on YouTube or Instagram, publishing online and so on. But as a freelance financial writer, I already spend a lot of time sharing my opinions on screen. Hence, this is another no-go for me.
My two favourite forms of earnings
My two ideal forms of passive income come from my efforts to improve my finances. For the next few years, I’m concentrating on these two ‘money machines’.
1. Share dividends
Dividends are cash payments made by some businesses to their owners — that is, shareholders. However, many listed companies don’t pay out any dividends. Some of these firms are loss-making, while others prefer to reinvest their profits into future growth.
What’s more, future dividends are not guaranteed. When companies get into trouble, some respond by cutting or cancelling their payouts. And if this happens, their share prices can slump.
By the way, some people claim that investing in shares is no better than buying lottery tickets. But I know that the National Lottery returns only half of ticket sales as prizes, delivering a loss of 50% for every draw. Conversely, the stock market has produced positive returns for investors over the long term.
In addition, when I buy shares, I know that I am buying part-ownership of businesses. If these firms are well-run and growing, then my shares should rise in value. Thus, I choose the companies I buy into very carefully, mostly from the UK’s FTSE 100 and FTSE 250, plus US powerhouses.
As my wife and I already have almost all of our wealth invested in shares, our share dividends are substantial. Even so, we keep investing these cash payouts into yet more shares to boost our future passive income.
2. Pensions
My wife and I (both Gen X and turning 56 in 2024) have amassed a collection of state, company and personal pensions.
Being over 55, we could choose to start drawing on these pots now. However, as we don’t need this income, we’ll wait while watching our pensions grow. Also, we keep contributing to these plans, using our regular payments to buy yet more shares.
In summary, my wife and I have staked our family’s financial future on the capital gains and passive income that come from owning stocks and shares. And with global stock markets booming in 2023, this has been a great year for us!
The post How I’m building passive income of £100k a year appeared first on The Motley Fool UK.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
