Earning money while you sleep by generating a passive income is a dream for many.
With that in mind, today, I’m going to highlight three smart money moves that you can make right now to put you on the path to generating that passive income for life.
Passive income tips
The first step on a passive income journey is to save more than you earn. The best way to earn a passive income is to invest your money. To do this, you need to have savings.
That’s why it is essential to put away a percentage of your income every month. An excellent strategy anyone can use to save money is to set a savings target every month and put this money away before spending anything. This save-before-you-spend plan can help anyone improve their financial position as you can only spend what’s left over after saving.
Today, you would be hard-pressed to find a savings account that offers an annual interest rate of more than 1%. As such, the best strategy to earn a passive income on your savings may be to invest your money.
Anyone can invest in the stock market. Most online stockbrokers offer a regular investment facility, which allows anyone to invest in the market from as little as £25 a month.
Investing on a monthly basis may also enable investors to benefit from ‘pound cost averaging’. Simply put, this is a strategy whereby investors deploy the same amount of cash every month and it reduces exposure to falling markets. Because the same amount of money is being invested every month, investors buy more when markets are falling and less when the market is high.
This allows investors to benefit from market volatility rather than letting it hurt them. It is also perfect when investing a small monthly sum because you do not have to spend a lot of time and effort in selecting individual stocks or trying to time the market.
Making the most of tax-advantaged accounts is another strategy investors can use to help them generate a passive income. Dividend income is currently taxed at 7.5% for basic rate taxpayers over the tax-free allowance of £2,000. However, there is no further tax to pay on dividends received inside a Stocks and Shares ISA.
Money earned from investments inside SIPP wrappers is also free of tax. You can’t take any money out of a SIPP until the age of 55. Nevertheless, SIPP tax benefits make it the perfect product to use to generate a passive income for retirement.
Any money contributed to a SIPP is topped up with a tax benefit at your marginal tax rate. That’s 20% for basic rate taxpayers. This could help reduce the time it takes to build a large financial nest egg and passive income stream.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.