How to make $41,000 a year with a ‘passive income’

There are many ways to build up a so-called “passive income” with some people making thousands of dollars a month.

Having an income from investments is the key to not being forced to work forever.

If you’re smart about how you invest, you can build another income stream that will ultimately replace your salary so you get paid without having to lift a finger. Now that’s not to say that when you get there you’ll actually retire, but it does give you options.

The option to take a year out to travel or spend time with your family, to change careers, to help out a non-profit to further a social cause, to start a new business and become your own boss. Or if you really want, the option to just kick back on the beach drinking coconut water to your heart’s content.

What is a passive income?

Passive income is a phrase that’s often blasted around the internet and across socials. There are a lot of myths, conflicting opinions and mixed messages out there so it’s easy to end up confused about what passive income actually means and to go about growing your own.

I wanted to unpack the key things you should be across if you’re looking at building another income through investing – and mistakes to avoid.

A quick note on passive income through property

Firstly, one area where I see a lot of people go wrong when planning to build a passive income is deciding on property vs. shares. Both have their pros and cons, but one is a clear winner when it comes to building another income stream.

Property is a great investment for growing your wealth and building your assets. This is because when buying property you generally use a smaller deposit and take out a mortgage, meaning you end up with an investment that’s worth much more than the amount of cash you put into your property investment.

Property is a good asset but not necessarily a good income stream. Picture: NCA NewsWire/David Swift

Average rental income on Australia’s east coast ranges between 2.5 per cent to 3.9 per cent, and after you factor in paying fees like council and strata rates, insurance, etc the ‘net’ rental amount you’re left with is lower. Compare this to an Australian Stock Exchange top 200 shares that had an income return of 4.14 per cent over the last 10 years.

The follow-on implication is that when buying property your asset position will increase faster.

But if the aim at some point is to be debt-free and be able to live off the income your investments are generating, you would need to have more wealth held in property to generate the same income as a smaller asset position held in share investments.

Get Cashed Up

Created by financial advisor Ben Nash, Cashed Up is news.com.au’s free six-week course to help Aussies get their finances in check. Those who sign up to the budget bootcamp get weekly, step-by-step challenges to improve their financial fitness.

By the end of the six weeks, participants will have set a budget, created a savings plan, learned how to invest, and sorted their superannuation. The interactive course can be started at any time and aims to empower participants to make more informed financial decisions.

Building passive income from a share portfolio

Using the 4.14 per cent long-term Australian share market average return above, you can start to calculate how big a share portfolio you’ll need to deliver a certain amount of income each month.

Based on these figures, if you had a portfolio of $1 million, over the last 10 years you would have generated an annual income of $41,400 or $3450 per month. So based on these calculations you should be able to figure out how much you’d need to have in your investment portfolio to replace your current income (or target income).

You don’t need to shoot the lights out

It’s natural when you invest that you want to shoot the lights out with every investment you make. You want to make big money with the next Afterpay or Google and get to your investing goals ASAP.

Investing consistently is more important than finding the next Google. Picture: NCA NewsWire / David Swift

But the thing is, trying to pick the next big winner in the share market comes with a heap of extra risk, and SPIVA statistics from Standard and Poors show that even the professional investors get these choices wrong more often than they get it right.

And, based on the figures outlined above, you can see that you don’t need to take this extra risk to get solid investment returns. What you need to do is to invest smartly, be consistent, and avoid the setbacks and momentum-killing mistakes that can slow down your progress.

Setting targets and timelines is key

Building an investment portfolio big enough to replace your income is totally possible, but it’s also not something that will happen overnight. You’ll need some time and to put in some work to get there.

And let’s face it, spending money is way more fun than saving and investing it. Investing involves saying no to something today so that you benefit in the future. While we all want the freedom that comes with being financially independent, sometimes in the moment saying no is hard.

A passive income can be built through investing, it just takes time.

So you need to give yourself every advantage you can to get there faster and easier. One of those hacks is keeping yourself motivated as you put in the work to build your investment portfolio.

And one of the best ways to create and maintain your motivation is to set clear targets and the timelines you expect to achieve them by. This helps you get confidence that what you want to do is achievable, and will deter you from getting too far off track.

It also gives you the confidence to get started.

Take action now

So many would-be investors get caught in the inaction trap, thinking that they want to invest, maybe doing some research, thinking through some options, but then fall down at the final hurdle.

Great ideas and epic plans have a place, but it’s only putting them into action that will deliver results.

The sooner you start, the sooner you’ll start getting results and the more money you’ll make from your investments. Because of the compounding impact of time and money, you make the largest return on any investment in the last year you hold them.

This means getting started one year sooner will make a big difference to your results.

The wrap

Building a passive income from investing is the biggest building block when you’re looking to create financial security and freedom, so it needs to be something on your radar.

But there’s so much noise out there, sometimes this isn’t easy. Money is a momentum game, so the sooner you take action the sooner you’ll start getting results.

Ben Nash is a finance expert, commentator, podcaster, financial advisor, founder of Pivot Wealth and author of the Amazon best-selling book Get Unstuck: Your Guide To Creating A Life Not Limited By Money.

If you want to make your first step a little easier, check out the news.com.au free six-week Cashed Up challenge – where you’ll get Ben Nash’s top tips and money hacks to make it easy to save more money.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.