Why do so many look for a secondary source of income? Now that sounds like a dumb question is it not?! I would like to classify people who look for secondary income into three broad categories.
I Some, make that many, do not earn enough and so want to earn more.
II Some, make that many (but not as many) read the importance of having passive income streams (guess from where!) and want to know how to go about it.
III I recently realised that some want income as a backup to their main source of income. Maybe as insurance against job loss or a risky venture.
The income can either be from some kind of activity (including collecting rent!) or from a corpus. Let us from consider ‘income from activity’
People who ask for ways to generate secondary sources of income and articles which list them give the impression that all one has to do is to follow a list of steps and the income would start flowing!
Well, ‘Passive’ income requires ‘active’ involvement! Take blogging for instance. Pretty much every secondary income source list has this as a means to an end.
That is like saying that the Everest can be climbed. Sure it can be climbed, but not by all! If you start a blog with the sole aim of earning from it, you are likely to fail. Secondary sources of income are often incidental and sometimes accidental (eg. inherited property). Working towards one will require planning, time and a sustained effort.
Income from a corpus
I find it baffling when young people want to derive secondary income from a corpus when they are still employed! This is a grave mistake.
As long as you don’t hate your job (too much), the goal should be to invest aggressively (which means invest as much as possible in productive assets) and build up a corpus.
In the case of a lay off one can live with this income and search for employment in peace. If enough corpus has been accumulated, one can afford to quit regular employment and freelance (among other things). Read more: E-book: How to retire early in India
My point is, before retirement (voluntary or natural) it is dangerous to ‘touch’ a retirement corpus either for income or for other needs.
A big fat corpus is an insurance against job loss and not income from when it when still being employed.
Dividends are not income!
I also find it baffling that many people are looking at dividends as a source of income. No, they are not!
Dividends are declared when a fund manager books profit and then distributes it among its unit holders. Read more: When do mutual funds declare dividends
This happens when there are gains to be booked and cannot be banked upon for ‘regular income’. Besides dividends from debt mutual funds are taxed at 28.875% at source as dividend distribution tax.
The smartest use of dividends post-retirement I have read about is by Sundaram Anathakrishnan (AIFW members need no introduction). His equity allocation (~40%) is primarily in dividend mutual funds. This serves as a natural profit booking mechanism where the gains from the equity bucket are transferred to the safer fixed income bucket. Of course, the dividends can also be reinvested in the equity bucket.
I cannot think of any other use for dividends. For regular income, once can always redeem either systematically (SWP) or manually from growth option mutual funds. Stay away from gimmicks such as this: Do not choose the moneyback feature of ICICI Balanced Advantage Fund!
Coming soon: An e-book on post-retirement income strategies.
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