Making the best use of your passive income

By BankBazaar | May 2, 2015

LotteryMoney_Lisa Brewster

Everyone likes a little extra in life. Be it a free topping on your favorite pizza or some extra stash of cash apart from your regular earnings. In today’s inflation-oriented world, where prices of just about everything is sky rocketing, the more one can earn the better it is. It is no surprise that families today are having double earning members and are still looking to generate some more passive earnings.

So what exactly is a passive income?

Simple speaking, any income that is not part of your regular income is a passive income. This may include the interests you earn from your bank accounts or FDs, any income you generate from rentals, dividends from bonds, earnings from the equity market and even the cash prize of a bumper weekly lottery.

Having a passive income is one thing, but making the best of it is quite another. Are you putting your passive income to good use?

Here are some tips to spend your passive income in the best way.

Count it and Plan it: Many people plan their finances based on their regular income and use their passive income as and when needed, without any fixed plan. Instead, just like you chalk out a plan for your regular income, you can list out your passive income and map it for separate investments or use.

Divert it towards an Emergency Fund: Diverting all passive earnings towards an emergency fund is a good idea. Your regular income can be pooled for EMIs and investments. At the same time, without disturbing it, a corpus can be accumulated as a cushion for any short notice requirements that can happen in your way.

Offset Rental Income with Loan EMIs: Regular income from rentals can be used to repay your loan obligations like home loan or car loan. This can be a helping hand to your regular income, accounting for better savings. This would also help you to feel light with debts and your regular financial plan remains undisturbed.

Re-invest it Wise: ‘Money is needed to make more money’ goes the famous saying. Suppose you are earning dividends from MFs or interest from FDs, this can be reinvested instead of taking it out and using it up.  This would help the money grow faster and work as a pleasant surprise of accumulated corpus when you look out for a specific need in future.

Open a Kid’s Account: Everyone wants to give a better future to their children. Passive income can be diverted to your kid’s Savings Account or an RD account in the name of your children. As it gets accumulated over the years, it can be used for their higher education needs.

3 Safe Investment Schemes to Pool Your Passive Income

Corporate FDs: This offers better interest rates than bank FDs and comes with short tenure of maximum 5 years. So, incomes like rentals, which are uncertain, can be invested in it. The interest receiving is taxed as per a person’s tax bracket.

Post-Office Savings Schemes: You have different options here likeNational Savings Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Smaridhhi Yojna. PPF is currently offering 8.7% returns, and NSC with 8.5%-8.8% interest rate. Sukanya Samriddhi Account offers 9.2% returns. KVP doubles your money in 100 months.

Tax-Free Bonds: Issued by government-approved companies, these come with 10-15 years tenure. The rates are generally lower than that of bank deposits and the returns are tax-free. But the capital gains are taxed.

To sum up, incomes likerental income can be used for paying loans or to plan for a contingency fund. Income from dividends and interests can be re-invested or diverted to kid’s accounts. Never fail to keep a tab on all passive incomes – don’t just spend it by clubbing it with other income.

Remember, spending money is one of the easiest things in the world. However, if you spend that extra bit of effort, you will discover wads of money that you never knew existed but had all along.

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