The values of most people are diverse, but often they converge in one thing – everyone wants to live the sweet life. In the opinion of the common man, the first step towards such an achievement is the complete absence of financial problems. Is it possible to enjoy life without thinking about daily bread, and how to achieve the goal? Our article will talk about options for generating passive income. These reflections are likely to inspire the reader, prompting them to create plans for the future to achieve a passive source of income.
Passive income is a way of generating income that requires little effort or is obtained without any effort at all. Now is a suitable time to explore the nuances of passive income, since rates on a significant range of instruments in the investment portfolio are currently significant. In theory, this can guarantee significant passive income returns. But what exactly are the possibilities? The article will allow us to assess real opportunities and dismiss myths that the layman is inclined to believe.
Types of passive income
Income received automatically implies the receipt of a fairly substantial sum of money for which a person makes no effort. For example, you don’t need to wake up every morning to an alarm and run to work: your finances are working for you. However, in order to receive benefits, you need to give benefits. This means investing a certain amount to subsequently generate a regular monthly income.
There are plenty of options: you can buy shares to subsequently live comfortably receiving good dividends, or buy bonds and receive rental income from renting out property or real estate. It’s also possible to make wise investments – a bank deposit that serves as a deposit. However, not all investment strategies guarantee safe and regular receipt of a significant passive income.
The desire to burn the earned interest on travel, entertainment and couture clothing like someone on the Forbes billionaire list is often far from reality. It’s worth taking a closer look at the possibilities and realities of passive income – for example, for the average resident of Moscow. The average salary in this region is approximately 200,000 rubles.
To live off interest and receive the above amount monthly without much effort, you need to choose suitable instruments and understand what initial amounts are needed.
Should money be invested in a bank?
One of the popular ways that everyone is likely familiar with is depositing money in a bank to earn interest. In the current Russian economic environment, this can be a very attractive option. Here it is necessary to examine the conditions dictated by the specific bank, as well as the type of deposit chosen. These factors allow withdrawing sums that accumulate at certain intervals. Such a development of events is attractive to most investors.
It should be noted that the Central Bank of Russia interest rate remains at a fairly high level, creating favorable conditions for bank deposits – currently 16%, the third highest value in a decade. An even higher 17% rate was marked by the start of the Crimean referendum and events in Donbass. The next time the rate started at 20%, after which it decreased to 17% two months later due to the start of the Russian SMO in Ukraine.
Deposit interest rates can significantly exceed official inflation, helping protect savings from devaluation. Exceeding state-level inflation can be up to 9 percentage points. This guarantees some protection against inflation “eating away” income, limits the need to monitor financial markets and track prices. An undeniable plus is also the relative safety of the saved amount, since deposits approaching one and a half million rubles are insured by the Insurance Agency. However, to generate 200,000 rubles of passive income monthly would require a substantial investment amount. According to independent expert Andrei Barkhota, a solid deposit of 15 million rubles would allow reaching such a sum – it is unlikely that an ordinary Russian citizen would have such an amount.
There are also drawbacks hidden in the conditions for depositing and withdrawing funds. For example, you need to invest your money for at least 3 months, and sometimes a year, and it cannot be withdrawn earlier. In this case, it is wiser to start with short-term deposits.
Thus, passive income can become a stable source of income, but careful selection of investment instruments and conscious financial decision-making are required for this.
Accumulation accounts
Accumulation accounts, as an alternative to deposits, provide more flexibility but rates on them may be lower. In any case, significant passive income generation on a savings account will require larger initial investments. This option is very similar to the previous one, but funds can be withdrawn more freely. The disadvantage is lower rates.
For example, if an investor needs to make large purchases, they will withdraw from a term deposit early. This almost always leads to loss of income. But in the case of using a savings account, a smaller percentage is lost, which is beneficial. An insurance system also operates, but rates are lower – they can be 5 percentage points below the maximum deposit interest rates. What does this say? About the need to invest a larger initial capital.
Real estate investments
Investing in real estate is one of the classic and most conservative ways to generate passive income. In Russia, this strategy is commonly used, but there are many myths surrounding it.
For example, in 2020 the cost of real estate increased significantly, while rental rates did not increase as strongly. Renting out an expensive apartment turns out to be not only a difficult task but also not very profitable in terms of returns. Data from CIAN shows that it takes over 20 years of renting out a Moscow apartment to recoup the cost of acquiring real estate.
However, taking into account that housing prices are constantly rising and the property itself will remain in place, the payback period should not be a concern. The main thing is to achieve the initial goal.
For example, the initial task is to generate 200,000 rubles in rental income from an apartment each month. This desire requires an investment of at least 100 square meters in a prestigious Moscow district – for example, in Patriarch/Moscow City. Initially, such real estate will cost you at least 20 million rubles. Moreover, the apartment is unlikely to please with an aesthetic luxurious renovation: you will also need to add a certain not insubstantial sum for furnishings. It is much wiser to purchase 3 different smaller apartments for middle-class tenants with cosmetic renovations, modern utilities and convenient locations for a similar cost. You should initially plan on an initial sum of at least 40 million rubles.
The term “passive” may not go well with the type of profit generating, as it requires competent business management, solving problems with repairs and renting out property, finding potential tenants. Part of the income will inevitably go into the negative – no way around it. It needs to be considered as an attractive opportunity – especially if you already have a suitable appealing apartment available for rent.
The appealing role of a rentier: rental business
An alternative to acquiring a suitable apartment to generate passive income could be an already operating rental business. For example, a pharmacy or a wine and liquor store in Moscow can provide a stable monthly income after expenses are deducted. Initially, such objects will cost up to 35 million rubles, which is more advantageous. Initially, it is necessary to focus on the profitable location of the object and your own knowledge of the internal mechanisms of such a business, managerial skills. If everything turns out well, the coveted 200,000 rubles in monthly pure cash can be obtained without problems.
Ownership share in a real estate fund
Another way to generate regular profits is to invest in closed-end real estate investment funds. Experts recommend that novice investors thoroughly study the reputation of the company and the growth potential of fund assets. The future investor must purchase a share in the desired asset using the help of the managing company. An investment of at least 25 million rubles in commercial real estate is required to reach the monthly average salary in Moscow.
In any case, real estate investing requires financial literacy knowledge and expert market understanding to make informed investment decisions. Independent experts argue that the risk-return ratio varies depending on location and the specifics of the particular asset. You need to be able to calculate the upper price growth limit for commercial real estate offered by state banks and private companies. By the way, a lot depends on the managing company, as infrastructure risks need to be considered to understand how attractive the company’s asset selection process is for future investments.
Buying bonds
Bonds are securities issued by governments and private companies to attract deposits. By purchasing bonds, you can realistically earn a fairly decent interest income, which can help generate the traffic obtained in a passive manner. The Moscow Exchange is a convenient place to purchase bonds, including corporate bonds and OFZ government bonds.
Investing in bonds with a high probability guarantees decent profits in conditions of significant interest rates. Choosing securities with high credit ratings carries less risk and potential dangers if comparing to stocks. Experts recommend forming a portfolio of various types of securities. By creating a portfolio of different bonds, you can ensure yourself future decent profits. Senior broker A. Vil’danov, working at “BKS Mir Investitsiy” recommends shifting the focus to corporate-type bonds with yields above 17%, fixed coupons. The value exceeds the standard Central Bank rate. This will provide a sufficiently attractive income – especially considering the rate reduction by the end of the current year to at least 10%.
A. Vil’danov recommends buying bonds of varying yields and ratings. Interestingly, lesser known companies usually promise higher percentages, while reliable ones issue bonds with lower yields. If successfully combined, it can achieve stable passive income, but companies will need monitoring in terms of reliability, potential risks and involvement in legal cases.
How to get dividends?
Passive income through dividends is formed in the stock market, where companies regularly share profits with investors. This is not a bad chance to earn, but it’s important to understand that dividend yields can fluctuate – sometimes it’s difficult to forecast. When choosing stocks to earn, study companies with high dividend yields – for example, “Surgutneftegas” – up to 20.2%, “Severstal” – 14.1%, “Lukoil” – up to 12.5%. It needs to be understood that companies previously in good repute stopped sharing income with investors after the start of Russia’s SMO, explaining this with numerous sanctions. The expert recommends paying attention to companies with high, over 15%, dividend yields.
Investments in stocks can be risky, as their value is subject to fluctuations – investments can depreciate, “crashing” in an instant. The financial market requires careful monitoring and regular analysis of the situation. Stocks can provide capital growth over the long term, but require active management and constant control. For those wanting to receive the previously mentioned fixed salary, activity will be required, which does not fully correspond to the principles of forming traffic of a passive nature.
Investment funds and ETFs: profit without risk or stress
For those not planning to independently manage a portfolio in the securities market, there is an excellent alternative – mutual funds (PIFs) or exchange-traded funds (ETFs). These organizations trade on exchanges. These funds allow investments using flexible strategies, ensuring capital preservation amid steady profit growth. This type of investment is collective, based on strategies that preserve and multiply the starting capital.
Today, foreign ETFs in Russia have essentially become inaccessible due to sanctions, but it’s worth looking at ruble funds traded on the Moscow Exchange. These funds can generate traffic with lower risks than investing in stocks. Fund managers that create shares help reduce investment risks. Currently, foreign currency and local funds are barely represented in the Russian market, due to infrastructure risks.
To generate passive-type traffic, it is recommended to study the specifics of exchange-traded bond funds. For example, to receive the previously mentioned 200,000 rubles/month, an investment of around 13 million RUB would be required. This approach also applies to investing in securities outside of funds. Choosing ruble funds carries far fewer “pitfalls”, as an investment fund manages funds on behalf of depositors based on bond shares.
Where to get startup capital?
It’s important to note that increasing passive income requires initial investments. Most ordinary people reasonably wonder how to form startup capital. Implementing any of the above cases initially requires at least 15 million rubles in investments. To realize your intention, you can lower expectations.
Start with small sums – for example, try to ensure at least a small amount of 10,000 rubles in monthly net profit. At the same time, experts recommend focusing on accessible tools – from classic bank deposits to investment funds. The main thing is to start taking action and expanding your investment knowledge.
So investment funds and ETFs provide earning opportunities while balancing returns and risks. Start with small steps and gradually increase your passive income, following the golden rules of financial planning.
The simplest approach, in the opinion of many financiers, begins with diligent work and savings formation, part of which can be spent on investments. Remember that the main goal is not to live on 10,000 rubles per month, but to gain knowledge to create a supporting passive income stream.
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