Introduction: Why to bother about building alternative income sources? Because every extra penny added to the wallet will add weight.
But what if the alternative income is not so big? How much is big? I believe, for a beginner even Rs.500 per month is a big amount. How?
To understand this we will first have to note that “alternative income” is not like salary income. How is alternative income different from salary income?
What is salary income? To generate this income, ‘work‘ must be done.
What is alternative income? Investment income is one good example. Alternative income can be generated without doing any work. Here money makes more money.
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Why ‘investment income’ is a good alternative income?
Most of my readers are salaried people. They do their 9-5 job, 5/6 days a week. It is only in their spare time that they can think about generating “alternative income’.
For me, the concept of alternative income is not about doing an additional work to generate more income. What is better is, generating a parallel income source in the present scheme of things.
How is the ‘present scheme of things’? Busy time table. In this busy schedule, additional work is the last thing that comes to mind.
So what can be done for alternative income? Resort to investment as a reliable and sustainable alternative income source.
Alternative income of Rs.500 per month is good-enough. How?
This example will prove that how valuable is every penny of alternative income. Once this theory is planted in our minds, it will help us see various alternative income sources in perspective of its valuation. What is the theory?
It is our money which can make more money for us…
“Money making money” is a concept which is as old as the theory of investment itself. We already know this, right? To generate returns, investment is necessary.
Let’s further elaborate on the ‘return on investment‘ by use of an example.
Suppose you have Rs.25,000 as spare money. You would like to invest it in a suitable ‘income generating’ option. The options available for investment are shown in below table:
|SL||Investment Options||R.O.I||Amount Invested (Rs.)||Annual Return (Rs.)||Monthly Returns (Rs.)|
|3||Monthly Income Plan (MIP)||7.50%||25,000||1,875||156|
What does the above table tell us? It says that, by investing Rs.25,000 in savings account it will generate an alternative income of Rs.73 per month.
By investing Rs.25,000 in MIP it will generate an alternative income of Rs.156 per month.
For many in India, Rs.25,000 lump-sum investment is still a big amount, right? But even a sum of Rs.25,000 is generating a feeble income.
So what does it explain? It explains that a much bigger amount will be required to generate Rs.500 per month. Let’s calculate that:
|SL||Investment Options||R.O.I||Annual Return (Rs.)||Monthly Returns (Rs.)||Invested Required (Rs.)|
|3||Monthly Income Plan (MIP)||7.50%||6,000||500||80,000|
What is evident from the above table? To generate a monthly income of Rs.500, an investment fund between Rs.80,000 to 1.71 lakhs is required.
It can also be read like this, “a monthly income of Rs.500 is equivalent to owning a lump-sum corpus of Rs.80,000 to Rs.1.71 Lakhs”.
What is the point? For people who think that an income of Rs.500 per month is too small, should see the size of corpus playing in the backdrop of those 500 rupees.
This is what makes alternative income generation a challenge. How to meet-up with the challenge? By getting into the habit of ‘alternative income generation’.
Building a ‘habit’ of alternative income generation…
What I mean by getting into the habit? If we get into the habit of doing something, we start doing it regularly. This becomes particularly helpful in doing things which are difficult.
What is the difficulty here? Building a big enough corpus which is able to yield required monthly income.
Building a dependable alternative income is not easy. Moreover, it will neither happen in a day. It takes a long time.
The difficulty doubles due to the fact that we are not in the habit of handling “investment income”.
We know how to handle ‘salary income’. We work – then we get a paycheck – we spend most of it – and the leftover goes into savings.
But ‘investment income’ cannot be dealt like this (it cannot be spent). Why? Because the source of investment income is not ‘work’, its source is money itself. If the invested corpus drys out, investment income will also stop.
For we common men, invested corpus often dry-out. Why? Because our brain is not trained to keep money invested long enough. Why?
Because we have been trained to invest money for “spending it on a later date” (for a goal). We do not know how to keep money invested forever.
When objective is alternative income generation the money should stay invested forever. Moreover, the invested corpus should grown bigger and bigger with time.
Bigger will be the invested corpus, higher will be the investment income yielding out of it.
What should be the characteristic of a good alternative income
It is not so difficult to get a part-time job to generate alternative income. People who are needy can do it.
But here we are addressing a different segment of audience. These are people who wants to have an alternative income source to decrease their dependency on the paycheck from job. For such people, if there is way, they would like to get out of the ‘rate race’ of the world and lead an easier life.
Their goal is to achieve financial freedom. They want to make their alternative income so big that one day it can replace their salary.
Such people should look-out for which type of alternative income sources? They should look for the following characteristics in their income sources:
- Automatic: Income must continue to yield on its own. No work should be necessary to be executed to make it happen. Like a bank deposit, buy it and forget about it. Interest income will continue to yield till eternity.
- Easily Scalable: Suppose your alternative income source is giving evening tuitions to students. One can teach only few students in a time slot of 1 hour. Such an income source are difficult to scale. But consider buying an ‘income plan’. Scaling it is super easy. Do a SIP, and scaling happens automatically every month.
- Less Capital Intensive: A real estate property can generate best alternative income (as rent). But for a common man, owning a property is not easy. Why? Because of its high cost of acquisition. But on the other hand, buying a bank deposit is more affordable.
The point is, a common man will continue to accumulate alternative income source only if it has the above minimum three characteristics. Why? Because these parameters motivates the person to do more of it, time after time.
Best alternative income source for salaried people…
There are only handful of ideas I can think of at this point. But whatever I will state here are all tried and tested methods. There is very less likely that one can go wrong with them.
- Bank Deposits: Buy a fixed deposit. Give it a standing instruction, to credit the accrued interest into your bank account each month. A beginner must start with fixed deposits to get into the habit of ‘alternative income generation’. The risk of loss is also near zero in deposits.
- Monthly Income Plan: Such plans are offered by banks and Indian post offices. But I am referring here to the mutual funds. This is also a relatively reliable way of income generation. The investment objective of these mutual funds is to generate “regular income with the focus on monthly payments”.
- Real Estate: Though it is a capital intensive option, but I will still like to mention it here. Focus should be to buy a property which is affordable and yields reasonable rental income. How to do it? Buy a small property (like 1BHK) in a tier-2 or lower cities.
- Stock Trading: Buy quality stocks available at low price points. Such stocks often picks its price relatively sooner. Though monthly income is not guaranteed here, but with some close watching, decent income can be generated out of it.
While dealing with “alternative income” generation, one must not bother too much about the level of returns. Even if it is low, go for it because here the objective is consistent income generations and not ‘high returns’.
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If you are a beginner, it is important to first get into the habit of ‘maintaining a source’ which can yield consistent income. Yes the focus should be on “maintaining”. Idea is to make the “source grow” with time.
When the objective is to build a sizeable alternative income, it is essential to keep feeding the corpus. A good way to do it is by starting a SIP in monthly income plans offered by mutual funds.