I was on a Sydney Harbour cruise. It was a Chandon Long Lunch on the new vessel “The Jackson”. We were guests on this impressive Super yacht. It was an absolute pleasure to be viewing the harbour from such luxurious surroundings. I recommend the cruise to all who enjoy a quality lunch with friends or business colleagues…wonderful.
On the 2.5 hour cruise we enjoyed Chandon Spritz and NV, with canapes, main course, then Gelati out back on middle deck as we sat and waved to the yachts passing by. My host and I got talking about Sydney properties and he mentined he had a friend who leased a 2 story apartment in the Barangaroo vicinity.
I made the casual comment that renting is lifestyle and investing is passive growth.
It is nice to live in a property that meets your lifestyle requirement. For this you have a job that pays the bills. However it is essential to have investments that meet your long term objectives. These investments should be self generating in growth or income. I.e. They should happen with little or no involvement from you. They are passive investments.
He nodded in agreement.
So what is passive investment?
Expanding on the generalisation above, passive investment is investment in shares, real property, superannuation, or business opportunity. In fact it includes any investment that has the capacity to generate income and/or capital growth.
Passive investment should also be tax efficient and carefully planned to reduce your annual tax bill.
I mentioned the concept of income v capital in my book “Lifes Equation” (Cox 2021). Most readers will be well acquainted with the fundamental difference between income and capital. For most, income is for living, and investment capital, generates income and/or growth.
In the book I explore conduits for growth. These for most of us include Superannuation, Real Property, and Shares in listed companies. The mix of these passive investments will depend on tax impact and personal preference. The book explains the relative tax paid benefits and limitations of each category. If you want more on this, then dive into the book.
The subject of this post is passive income and why it is important.
Lets briefly consider the above categories to explain passive income further.
Both Superannuation and a Self Managed Super Fund have the same objective and outcome which is capital growth. But one is passive, the other is not.
Superannuation for most people is a ‘set and forget’ investment. i.e. you hand your money over to a fund manager and he invests it for you. Most people don’t change their investment strategy within a Super Fund, because frankly they don’t have the expertise or time to make an educated decision. They set it and forget it. It is an example of passive income and growth, that frees you to focus on income for lifestyle.
Self Managed Superannuation (SMSF) requires a serious investment of your time and expense to make it worthwhile. If you have a SMSF, then you will know what I am talking about. Its a lot of work and comes with statutory compliance costs. By the way, a SMSF, is not a passive investment, because it requires your constant attention to ensure a reasonable return.
Real Property by its physical nature, is an investment in passive growth. Most people will buy property for capital gain. There may be income on the way through but the end game is to reap the benefits of a capital gain. There may be lifestyle benefits in owning your home, but in the end it will be a major capital asset in your retirement. If you have a rental property(s), an agent will manage it for you and therefore net income is passive income. Again, you do not have to lift a finger or take your eye off your career prospects.
Share ownership will generally be a set and forget investment and for dividend yielding shares, a source of income. But unless you are a share trader (most are not), then by acquiring shares, you are investing in passive income.
Why is passive income important?
If passive income is part of a sensible strategy that is mindfull of the long term and tax minimisation, then it absolutely makes sense to have passive income inherent in your investment strategy.
It frees you to focus on your job or business prospects, by leaving the management of investments to others more disposed to get you the best return.
It means that you don’t have to manage time and compounding gains. Provided that keep an eye on the financial returns and that you re-visit strategy from time to time, then the passive approach will allow financial mechanisms to happen while you are busy enjoying life.
Investing for passive gains enhances your quality of life while still working and when in retirement, because you will have more time to enjoy it.
All the best
Peter