Why you need to focus on passive income?

That means their expenditure must be lower than the tax or non-tax income. Due to the large demography in India, such a scenario is implausible for years to come.
This image is used for representational purposes only.
This image is used for representational purposes only.Express illustrations

In wealthy nations, there is a concept of social security. You can claim a ‘jobless’ allowance if you do not get work. In Scandinavian countries, people get a monthly dole even if they just sit at home. The guarantee of income gives financial security to ordinary people in rich countries. That is possible due to the smaller size of those countries in terms of the number of people.

In India, there was a debate about a universal basic income. Political parties often promise such ideas during the election season. However, to execute such a thing, the government finances need to be in a state of perennial surplus. That means their expenditure must be lower than the tax or non-tax income. Due to the large demography in India, such a scenario is implausible for years to come.

As a result, each of us has a financial security onus. The government will do what it can within the Union Budget framework. You can hope for the best, but the truth is that you have to secure your finances so that you do not have to depend on anyone else. For that, your financial habits matter.

The Reserve Bank of India’s annual report for 2023-24 shows that net financial household savings fell to 5.2% of gross national disposable income (GNDI). In the financial year 2013-14, they stood at 7.2% and averaged around that level. The net household financial savings rose sharply during COVID-19 but fell as most of you utilised savings for expenditure.

The fall in net savings is due to a sharp surge in household financial liabilities, which rose 5.7% of GNDI from 3.1% ten years ago. There is borrowing for buying new homes and other assets. Households also borrow money for automobiles, travel, and other consumption expenditures. That is reflected in the surge in credit card payments made in 2023-24 to R 18,30,000 crore. That is nearly double the payments made in 2021-22.

Your habits thus far have skewed in favour of saving and spending rather than investing. The RBI data also shows that your love for hoarding cash remains unchanged despite demonetisation shocks and digital payments. Your affinity for physical assets is high, with most of you wanting to own homes, property, or physical assets like gold.

However, the RBI data also indicates a visible increase in household allocation for insurance, provident and pension funds, shares, and debentures. If you combine that data with the surge in demat account holders, mutual fund folios and bank accounts, you know there is a definitive move towards the ‘financialisation’ of savings. Although not yet meaningful, it will likely be a secular trend. Technology is likely to enable more savings in financial assets.

Passive income

Money begets money. It is a cycle that can start with small steps and grow into a complete financial security solution for you and your family. To create a passive income from scratch, you must put your savings to work to build an investment corpus. You need to invest more in equity assets to generate higher returns than other asset classes. That allocation is based on your risk appetite. Your ability to take the risk is based on your confidence in your future income. That is possible only when you manage your expenditure and create a monthly investible surplus.

If you are lucky enough to have inherited wealth through money or property, you can be in that position sooner than later. A passive income generated through a long-term rent or regular interest on deposits or dividend payments in top companies can be that risk capital. In the early years of your work, you must focus on saving and investing actively to create a passive income.

With steady economic growth predicted for India over the next several years, you can achieve that goal and generate a passive income source. Since it is a perpetual income, you can allocate more to equity or equity-linked assets. That is provided you have no outstanding loans and another source of income to pay for your monthly expenses. Such a cycle of saving, investing and reinvesting can help you build your financial security net. Getting a good professional advisor can make a big difference, too.

Rajas Kelkar

(The author is editor-in-chief at www.moneyminute.in)

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