Money BasicsInvesting

How to make money work for you

One of the best ways to increase your income is to have multiple income streams. Having money come from different sources adds up in the long run. With the right knowledge, you can find and seize opportunities to grow money, elevate income, and bring aspirations closer.

Before you think about growing your money, see if you have a better grasp of your financial situation. Are you living from paycheck to paycheck, with barely enough money for savings? Do you have enough money to pay off debt?

If your answers are “No” to most of these questions, then skip this article. But if they are all affirmative, then you may continue reading.

Active versus passive income

When you’re looking to increase your income outside of your regular paycheck, you must understand that there are two types of income sources: active and passive.

An active income is the money you can earn through your direct efforts. It is money you work for. On the other hand, passive income is money you can make indirectly through investments. To put it simply, passive income is about making money work for you.

But whether your source of income is active or passive, you have to think about “risks.”

Risk is a broad term. When applied to finances, it means loss. Given this definition, consider these four major criteria of risks associated with income:

  • Low-risk sources of active income
  • Low-risk sources of passive income
  • High-risk sources of active income
  • High-risk sources of passive income

Sources of income

Let’s take up each criterion and understand what it means to growing your money.

  1. Low-risk sources of active income- The first thought that comes to mind when growing income is having a side hustle or a “gig.” Often, this involves making use of your professional skills, such as writing and graphic design, to do short-term, contractual jobs. In this scenario, there’s no real risk of financial loss because you’re only exchanging time and effort for money. This type of income also applies to freelancers and consultants who are paid per project or through regular retainers.

  2. Low-risk sources of passive income- Interest-bearing income sources like a savings account and a time deposit fall under this criterion. These so-called financial instruments are very low-risk because they’re insured by the Philippine Deposit Insurance Corporation, meaning the money is protected. Meanwhile, treasury notes, treasury bills, and treasury bonds are other sources for low-risk, passive income. These are like IOUs offered by the government, which promises substantial returns.

  3. High-risk sources of active income- If you want to go for higher-risk options, day trading stocks and running a business are top-of-mind. Day trading stocks takes a lot of time and effort, not to mention a deeper financial acumen. It also takes time away from your day job, and by its nature, is risky. Potential financial loss is likely going to happen due to movements of prices. Meanwhile, running a business also comes with risk. You need to spend money to set up shop and to keep the business afloat. A business can fail. But if it goes well and is stable, a business can provide much needed passive income.

  4. High-risk sources of passive income- Investing in stocks, as opposed to day trading stocks, is one sound way to create passive income. When you invest in stocks, you buy and wait for stocks to go up in value over time, allowing ups and downs of the market to even out the risks. This option is different from day trading stocks, where you bank on buying low and selling high. Another option is to buy stocks that give out cash dividends so you can slowly grow your money. Despite this more conservative approach, this option is still risky because there are no guarantees that a stock will perform well or give out dividends. Picking stocks to invest in will require deeper understanding of public companies. This will help you make more informed decisions on whether to continue investing in them or not. You can also choose to invest in an exchange-traded fund, a mutual fund, or a unit investment trust fund with stocks.

The importance of mixing it up

In general, most people start out only having one source of income, their salary. While having a regular job is good, it might not be sustainable in the long term because of one thing: age. With age comes additional responsibilities as one moves through the different milestones of life. At the same time, the body needs more care to stay healthy. This means either your single source of income grows at the same rate of your needs or you establish other sources of income.

This is why it’s ideal to seek sources of passive income early in life. Constantly putting money in low-risk sources of passive income lets you take advantage of compound interest, which is when an investment grows faster as it continues to gain interest. On the other hand, engaging in high-risk sources of passive income early on in life also has its advantages. Investing in a blue-chip stock that looks to continue growing in the next decade despite ups and downs in the market is an example of this.

Of course, figuring out which sources of income are right for you depends on your personal circumstances. People have different levels of tolerance for risk. Others may not be able to afford to take risks because they have dependents. However, what’s clear is this: having multiple sources of income is the way to transition to a point of your life where your money works for you.

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This article is part of a collection of stories and practical financial tips that are published with the goal to help people learn from the experiences of others, and to pick out lessons on personal finance and sound money habits beyond the pandemic.