Your financial walk through life - passive income

Let's stand back a bit and take a look at your life from a financial big picture point of view. I've already mentioned active and passive income. Active income is the stuff you have to work for (you know - eat, to live, to work, to sleep, to eat ........).

What should your active income be used for? Three things -

to pay your way (food, kids' schooling, the rent, .....)

to enjoy yourself (movies, holidays, sport, ........)

to build your passive income!

Why do we need passive income? (that's the stuff we don't have to work for, it just comes rolling, or trickling, in). Well we're all going to retire one day (if we live that long) and retirement means not working and that means no active income. So in order to be able to retire, you need to have built sufficient passive income for your needs.

By the way, "be able to retire" does not mean "retire". Being able to retire makes working such a pleasure - you don't have to do it any more so now you can do it for fun!

Start by working out how much you'll need - what I call your "retirement budget". Ignore inflation and use today's costs. Assume that all of your debts are paid when you retire (they must be). Remember you must plan to replace the durables every so often (your car, fridge, washing machine etc.).

You need to repeat this exercise every five years or so for two reasons.

1) Inflation changes the numbers and

2) Your perception of your retirement needs changes.

So what number did you come up with? Probably somewhere between R30 000 and R60 000 per month. That would be after tax, so make that R40 000 and R90 000 before tax.

If you're investing in "funds", multiply that by 400

If you're investing in residential property multiply that by 150

If your investing in commercial property multiply that by 130

Scary answer? Somewhere between R5m and R35m?

But why such a wide spread? Well, that's all to do with risk. You see, if you invest in funds, other people will look after your money and your income will be pretty safe. The downside is that you'll get very pedestrian returns (like 3% above inflation which is the bit you can spend). If you invest in property, it could stand empty for months, or it could burn down. The risks are higher, so you expect (and get) a higher return.

It's your call. Me, I like property, others like dividends from blue chip shares (what I've referred to as funds). I don't come across many people who can get their heads around both forms of investment.

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Should you wish to make an appointment, please feel free to visit Derek's diaryand booka time that suits you.

 


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