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Last updated: July 2020

Young Investors

6 Steps to Building Passive Income

Monday, 13 May 2013

For those suffering from memory lapse, I'll expend a few more pixels for your benefit.

Passive Income is "Investing to generate another source of income."

What is "Investing"? Definition of "Investing" – "Using money you can afford to lose to grow your wealth for you", the two essential components being:

  1. Money You Can Afford To Lose

    This is the extra money after deducting your essentials. Taking your rent or food money to invest is unwise. Stupid in fact. When you can't afford to lose that money, you will be desperate financially, resulting in a lack of holding power (next article). When you have no holding power, you will be at the risk of selling your shares at an unfavorable time. So if you really don't have any extras, I suggest you follow some tips on Money Management first.

  2. Grow Your Wealth

    Your investments shouldn't just help you make money. It has to grow your wealth. It has to grow at a greater rate than inflation so that you are earning real returns. If it isn't, you might be better off just spending the money for short term gratification.

    Today we'll do a quick run through of the 6 steps to building your passive income so you don't have to suffer the pandemonic nightmare the Chinese call "hands stop, mouth stop". Ask your Chinese friends if you don't know what this means.

      • Step 1 – Planning Your Capital

        Determine how much money you can set aside on a regular basis. Use these as financial resources to build up your Investment Capital. Plan, keep track, and discipline yourself to stay on track! Discipline is an important quality for investors and it will take you a long way when you invest.

      • Step 2 – Learn the Basics of Investing

        As Warren Buffett said, "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." Investing is simple. However, you still need to know the basics! This helps you have a better idea to make informed decisions when investing. And that's why you're here in Young Investors. Learning how to read Financial Statements, Annual Reports will definitely help you a lot in your journey.

      • Step 3 – Know Your Risk Tolerance/Appetite

        How much risk are you willing to take when it involves money? Do you take bigger risks for bigger returns? Or do you take minimum risk for small but steady returns? Or are you somewhere in between? There's no right or wrong here. Risk Tolerance/Appetite varies according to your age, income, goals, background etc. If you had to rate your Risk Tolerance/Appetite from 1 to 10 (1 being minimum risk, 10 being gambler), what would it be?

      • Step 4 – Determine Your Investment Vehicles

        Now that you know what your risk tolerance/appetite is, it's time to pick the investment vehicle(s) that best matches you. The Young Investors Team has a detailed piece called Dissecting Investment Vehicles that will help you make your decision. In this case, we'll use Securities (the stock market) here as our example.

      • Step 5 – Select and Monitor Your Counter

        This is the very important step where you decide which counter(s) you wish to invest in. Many investors struggle and encounter problems when choosing counters to invest in, and how to monitor the counters. This step involves perspective (your own), preferences, and behavior control (your emotions when investing). It is really subjective. Again, no right or wrong.

      • Step 6 – Review Performance

        After every trade (buying and selling stock), we should study the outcome. Did it perform as expected? Was it prolonged or shortened? What caused the outcome? Any improvements to make? Any insights? This is to ensure that we learn as we go and improve our investment skills as we grow.

Looking Back

Feeling stressed after reading all that?

Yes, it doesn't look simple, yet it actually is quite simple.

Don't worry, you will definitely grow and improve by sticking with Young Investors. Let's all move towards having a strong passive income, so that one day, we might be able to sit together and tell each other, "I'm not working anymore. My money's working for me."

By the Young Investors Team