Is Passive Income REALLY “Passive”?
Many people have been sold the idea of passive income being “easy”, something that requires little to no effort. This is a HUGE mistake in my opinion.
To create this passive income source, we need to put in both work and capital:
1) Work
An example would be researching into a company whose stock we are interested in buying. After we have done the research and assessed that this company is one worth buying, then we allocate a portion of our capital into it. We receive the dividends (if any) that the company pays out.
Does this really sound “passive” to you? Our initial research takes time. We also need to monitor the company’s performance on a periodic basis, to assess if it still fulfills our investment objectives.
2) Capital
If we don’t want to do the work, then we’ll need to pay someone to do it. The person that does the work gets a cut of the profits. We’ll need to find someone reliable and honest, which is not as easy as it sounds.
The 5 “Passive Income” Streams
1) Dividends
The passive income stream that most people are familiar with are dividends paid out from the companies we hold. As alluded to, we need to perform our initial due diligence of the company. If not, we’re gambling and not investing.
What’s Needed: Work + Capital
My thoughts: The only monitoring we’ll need is to assess the fundamentals of the stock (whether it is generating sufficient cash flow to continue paying out dividends). The Singapore stock market (in particular REITs) is great for dividend investing.
2) Options Selling
Options allow us to profit no matter whether the market goes up, down or sideways. It also requires little capital to start with (just $100 is enough to get started), which naturally entices many speculators. When done properly, option selling can help us generate a steady stream of income.
No matter how good our options strategy is, if we use it on the wrong stock then nothing else matters. Ultimately, it still comes down to the fundamentals of the underlying stock.
Options are decaying assets (which is why selling options work if done correctly). Yes, there are people buying options hoping for quick exponential gains but these are hard to execute on a consistent basis.
What’s Needed: Work + Capital
My thoughts: I am a proponent of keeping things simple so I don’t have to monitor my positions all the time. Some basic option strategies include cash secured puts, covered calls and credit spreads.
3) Crypto Staking
This is quite a new concept that has been gaining popularity in the past year. It’s also one which I have started to explore recently.
Think of staking as receiving dividends in the form of crypto instead of cash.
Let’s say we hold $1,000 worth of Bitcoin (BTC). Instead of simply holding it and waiting for the price of BTC to rise, we can stake our BTC. Staking allows us to earn rewards (in the form of Bitcoin) for holding Bitcoin.
Which crypto to buy? When in doubt, go for the cryptos with the largest market capitalisation like Bitcoin (BTC) and Ethereum (ETH). You can find the information here.
Where to Stake?
If you’re already holding some crypto, and would like to explore staking, you may want to check out the hodlnaut platform. You’ll get US$20 sign up bonus when you sign up using the link here.
Even after the downward revision of interest rates (with effect from 8 February 2022) for staking, Hodlnaut still has one of the best (if not the best) crypto staking rates.
Hodlnaut is a certified Fintech by the Singapore Fintech Association, an accreditation recognized by the MAS (Monetary Authority of Singapore). This adds an extra layer of comfort for people who might have doubts about the legitimacy of the platform.
What’s Needed: Work + Capital
My thoughts: Even though there’s much crypto news on mainstream media, the adoption of crypto is still fairly low among the laymen. Crypto has its fair share of doubters and I don’t fault them as its real life use cases are yet to be seen. My view is that it is fine to have a small exposure to crypto. For beginners starting out, stick to the big names like BTC and ETH.
4) Axie Infinity
Axie Infinity operates on a play-to-earn model. This means that we play the game to earn rewards. These rewards come in the form of crypto, namely smooth love potion (SLP).
There’s 2 ways to play this Axie Infinity thing.
- Play the game ourselves
- Hire others to play (Axie Infinity Scholarships)
We’ll discuss about the hiring others to play the game here (which I personally use). To play the game, we need at least 1 team, which consists of 3 Axies. These 3 Axies can be purchased using Ethereum (ETH), which costs about 0.25 ETH (about US$ 1,000). Rewards are paid out (in SLP) every fortnight, which works out to about 2% to 4% per month. The risk here is that if the price of SLP drops, these payouts might be worth less.
Profits get paid out to 3 parties:
- Investor 40%
- Scholar 50%
- Manager 10%
The work here involves finding scholars and managers to help us manage the team. These people must be trustworthy, if not we risk getting cheated. The percentages paid out to each party are not fixed and are subject to negotiation. The above is just what I am getting myself.
I am NOT an expert at the game (in fact I don’t even play it). I apply a totally hands-off approach by having the managers and scholars manage everything on my behalf (including payouts) while I collect my share of 40%.
What’s Needed: Work + Capital
My thoughts: Play-to-earn games are still in its infancy. The majority of these games will eventually fail (in my opinion) so it’s best to allocate capital you’re willing to lose.
5) Waybetter
This one is not related to investing, but I thought I’ll just put it out there. The idea behind the name is to live way better (and get paid for it).
Waybetter is a platform that offers games in the following 3 categories:
Fitness
Nutrition
Mindfulness
There are many games in these 3 categories, from running to reading to healthy eating. Pick and choose whatever activity we want and get paid for it. If it’s something that you’re already doing on a regular basis, why not get paid for it?
Some of the things we can get paid for include:
Drinking Water (YES this is not a joke!)
Eating Fruits (Ditto this)
Reading a Book
Yoga
Calorie Tracking
And many more…
We can get paid for things like drinking water or even eating a fruit a day! Have you ever come across such a thing?! Granted you’re not going to get rich from this, but if you’re already doing these things anyway, why not get paid for it?
The only caveat is that it’s not free, although there is a 7-day free trial. After which, it costs US$129.99 for 6 months. That works out to about US$22 per month. An alternative is you pay to enter a game (most are US$10). If you’re serious about doing this long term to live way better, go for the subscription. It is more expensive but well worth it. We can easily make the subscription fee back (and more) if we participate in a few activities.
What’s Needed: Work + A little bit of Capital
My thoughts: I just started using a few weeks ago so it’s probably too early to draw conclusions. From first impressions, the platform is user friendly, which helps you get started on an activity which you might need some accountability for. If you’re someone (like me) who would needs motivation to start exercising, this app will come in handy. They even provide guided workouts (all you need is a set of dumbbells and exercise bands).
Concluding Thoughts
There’s nothing that’s really “passive”. Someone who tells you otherwise is either delusional or out to scam you.
The ONLY passive income equation you need to know:
Work + Capital = Passive Income
What are your thoughts about passive income? Do you think it’s really passive?
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