You might have heard about the importance of building up multiple streams of income to recession-proof yourself.
In fact, you might even have heard that passive income stream is way more important than an active income stream.
In this article, we will be finding how you can start building up multiple streams of passive income in 3 easy steps.
How does one build up multiple streams of passive income?
Understanding how passive income is created can help you find or build your own way to achieving it.
1) Do You Know The Difference Between Asset And Liability?
In layman terms, an asset is one which accumulates/ provides value over time. A liability is one whose value declines overtime.
So, what category is a car? An asset or liability? It depends – if you own a car rental company, or if you are a taxi driver, then the car is your tool. It is your asset.
But if you just own a car for your leisure purposes, then it is a liability.
It doesn’t make money for you.
What is your biggest asset currently? A lot of people will mention that it is their current home. Their HDB flat. The next question is, how many homes do you own?
If the answer is 1, and they are currently staying in it, then it is not an asset.
Confused yet? Let’s recap what is the definition of an asset.
An asset is one which accumulates/ provides value over time.
A liability is one whose value declines overtime.
So, while the HDB flat in which you stay does accumulate value over time, but the accumulated value is paper-gain (value gained in paper only, and only realised when you sell off the flat).
Plus, when you sell off the flat eventually and realizes the value, you most probably have to purchase another flat to stay.
And when prices of property rises, it is usually across the board, so you most probably have to purchase another flat to stay during times where property prices are high.
Be clear on what items are assets and what items are liabilities. Build up on assets, and reduce your reliance on liabilities.
Bear in mind that this is not advocating zero liabilities, that is near impossible.
Indulge yourself once in a while, but don’t go overboard. As long as you are fully aware what items are assets and what items are liabilities, you can make smarter purchasing decisions.
2) Do You Have More Than 1 Stream Of Income?
Step 1 shows you how to tell an asset from a liability.
Now, you know that to accumulate wealth, you need to build up your asset base.
How then do you build it up?
You need to have income inflows. The easiest way to do this is by having a job, to exchange your time, talent and skills for a pay check. That is 1 stream of income.
Having said that, having just 1 stream of income is risky. Gone are the days where you can work in an organization till the day you retire.
Layoffs, retrenchments, redundancies, all these are familiar words in this era. You might love your job, you might love what you are doing, but you never know when your company stops loving you back.
To mitigate this risk, always have back up plans.
Have more than 1 stream of income. Even better, create multiple streams of income. Use your talents to build multiple streams, explore further and make your talents work harder.
3) Is Your Income Stream Active Or Passive?
A few definitions here:
Active income is an income stream where you have to exchange your time, talent and skills for money. Your time and effort makes money for you. (eg. A job)
Passive income is an income stream where you don’t have to exchange your time, talent and skills for money. Money making more money for you. (eg. Investments)
Most people rely on active stream of income, that’s why they can’t afford to retire.
Once they retire, their income stops. That’s why one has to start building up passive income streams. This way, the individual can choose to work, rather than needs to work.
So, in summary, distinguish between assets and liabilities. Build up more than 1 stream of income. Even better, build up multiple streams of passive income so you can your asset base for wealth accumulation.