In the Philippines, it’s really unfortunate that financial education is not built into our school system.
We’ve been told to study hard, work hard, and help out the family. From when we started going to school until we started our career, that’s what we’ve always been told. They never told us there were other ways to earn.
I wished someone had told me.
You don’t have to feel bad like I did. Here, I will share the secrets of passive income. It is the secret that allows people to let money work for them. That even when they’re asleep, they’re earning. They have multiple income streams, allowing them to become a millionaire faster.
What is passive income?
Passive income is anything that allows you to earn without having to do active work.
A good example is earnings from rentals. If you own real estate property — such as a condo unit, lot, apartment, house, building or even a spare room — and you rent it out to other people, you can receive regular stream of money with little to no effort. Except maybe for the general upkeep of the property and collecting the rent.
But really, what you did was to allow people to use your property in exchange for a set amount every month. However, real estate requires too much money. Constructing an apartment needs a big investment. If you don’t have the needed capital, you end up borrowing from banks or Pag-IBIG.
Are there other sources of passive income that can have higher returns than savings accounts or that would not require very big upfront cost like real estate?
The answer is yes.
Benefits of passive income
By now, the benefits of passive income may already be apparent to you. Your earning doesn’t stop. You can get to increase your net worth even while you sleep.
Who wouldn’t want that?
1. Working smart rather while working hard.
Passive income allows you to live your life fully while you’re earning. It’s money that is working for you instead of you working for money. Which means you’re free to do the things that mean a lot to you.
You have more time to spend with your family. You’re in a better position to focus on your work or business. You get to hang out with your friends more.
2. Open multiple income streams.
Passive income makes it possible for you to make money from multiple sources. Wouldn’t that be nice? This is especially true if you’re working or running a business. Aside from the dough you’re making from your active work, you can bring home more.
Also, you have a sort of cushion during unexpected events. If you lose your job or your business goes down, your other income streams can help you tide over until you get back to your feet.
3. Meet financial goals faster.
You can meet your financial goals faster with passive income versus just relying on your salary alone. You can obtain more funds more quickly with multiple income streams, meeting your financial goals faster.
You can go on your dream vacation earlier. You get to save up more and put up a down-payment for a brand new car or house in less time than it would take when you’re earning only from one source.
Now, you might wonder. It sounds too good to be true. Well, there are things to bear in mind about passive income. There is risk involved. But so is everything else.
There’s risk that people won’t pay their due on time. Renters might vandalize or destroy your property. The location may be prone to flooding. New developments in the area, such as landfill or live poultry farm, could devalue its worth.
But what are the risks involved? First, there is risk that the capital might depreciate. When you start taking part in managed funds that are into stocks, as we will discuss later on, there are times that the market might not perform well. It could lead to a decrease on the worth of your investments.
Second, there is risk that the potential return is not realized. Again, we will discuss ways on how to manage such risks, such as diversifying your investments and going for long-term planning. Always remember that risk is everywhere, even with passive income. Bear in mind that you miss 100% of the shots you don’t take.
So below are easy passive income every Pinoy must know and start right away. They require only two things: time and good cash flow. What’s more, they’re either managed or regulated by the Philippine government.
1. High-yield savings account
Yes, the lowly savings account is the easiest passive income anyone can find. Unfortunately, according to a recent study, only one out of four Filipinos have one, so we hear a few stories from Jessica Soho’s show on families who couldn’t exchange their old bank notes they’ve saved in piggy banks for so many years.
It’s sad because anyone can open a savings account. Also, it’s easy to start one, convenient to use, and relatively risk-free as funds are insured up to half a million pesos. It can possibly earn you at least 0.25% every year before taxes which most banks would credit every three months.
Can you become a millionaire through a savings account? Yes, but only if you consistently save. Say that you decide to open Bayani OFW Savings Account from Sterling Bank of Asia, which offers 1% for required balance of P2,000. Then, you can actually save at least P8,001.89 per month to become a millionaire at the end of 10 years.
Here’s the top 10 best savings accounts in the Philippines:
In addition to regular deposit accounts, banks also offer savings accounts for kids. Their interest rates are comparable, if not even higher, than the traditional ones. Some banks even offer free dental care, insurance, or educational benefit. Below are the top 14 best savings account that you would want to start with your young children.
2. High-yield time deposit
A time deposit is the same with a savings account except that you get higher interest with less liquidity (liquidity means your ability to withdraw your money from the account). The bank holds your funds for a specific period of time, and you can only get it on the maturity date. Should you wish to withdraw before that, you would pay a fee.
Starting a time deposit is as easy as opening a bank account. It’s convenient as you can open a time deposit and a saving account in the same bank. Also, the interest starts at 0.875% to as high as 4% before taxes, and your money is insured up to half a million pesos. Plus, you can choose how long your fund is parked like 90 days, 180 days, a year or longer.
To earn your first million with time deposit in 10 years where the interest is credited annually, then you need to save P96,216.76 each year. Below is the top 11 best time deposits accounts in the Philippines.
3. Variable universal life or investment-linked policy
An investment-linked policy is an insurance plan that allows you to invest. It is also called “VUL” or variable-universal life policy. Through this product, you can get insured and invest at the same time. It makes buying insurance as well as starting an investment easier.
The downside is that there may be fees involved in opening and maintaining this account. Fortunately, this is perfect for those who are just starting into passive income as it gives insurance protection from sudden demise, critical accident, or accidents while building wealth.
You can buy this kind of policy from insurance companies through their agents. Below is a table of the top life insurance companies in the Philippines based on premium income, asset, net income, paid-up capital, and net worth.
The agents are licensed by the government; meaning, they were trained, took an exam conducted by the Insurance Commission, and then passed. You can ask for a sample quote which should tell you how much insurance you’re getting and a forecast on investment returns.
For instance, if you are a 20-year-old, you can start a policy with a monthly premium of P7,077.14. You’re insured up to P2.5 million and your investment is projected to be a million pesos on the 10th year. (This assumes that you’re in an equity fund with rate of returns of at least 10% annually.)
4. Mutual funds
A mutual fund is a pool of money that is invested in company shares or bonds (debts that pay interest) with the goal of maximizing returns for its investors. It is managed by a fund manager who buys and sells shares and/or bonds, freeing investors from all the hassle.
Anyone can open a mutual fund. In fact, it’s like starting a bank account. The required opening investment is at least P5,000 although I’ve seen others who accept even lower amount to start an account. While there is no holding period, some companies will charge a fee if you withdraw within the first six months. Plus, all earnings are tax-free.
As of April 2019, the average returns I’ve seen among equities funds (funds that are into stocks) is 5.34%. If you want to earn your first million after 10 years, you can save at least P6,423.98 monthly.
5. UITF or unit-investment linked funds
Don’t get fooled with the name. A UITF or unit-investment linked fund is like a mutual fund. There are many differences between the two, but the key difference is that UITF is managed by a bank while a mutual fund is managed by an investment company.
Like a mutual fund, a UITF has a fund manager that oversees the day-to-day trading, allowing investors to earn passive income. You can start with P5,000. There might be fees when you withdraw within a certain amount of time.
For UITF equities fund, the average rate of return is 6.25%. By saving at least P6,110.70, you can be a millionaire at the end of 10 years.
6. Pag-ibig MP2 savings program
The Pag-ibig MP2 (Modified Pag-ibig II) is a government-guaranteed voluntary savings program that allows you to save and earn tax-free dividends. It is managed by the Home Development Mutual Fund (HDMF) or commonly known as Pag-ibig.
It is very easy to open a Pag-ibig MP2 account. Just go to aPag-ibig branch near you. You can start as low as P500 per month. However, it has a lock-in period of five years.
According to Pag-ibig, the average dividend from 2015 to 2017 was 6.96% per year. Earning your first million through the MP2 program requires you to save at least P5,988.49 per month for the next 10 years.
7. SSS PESO Fund
The SSS PESO (Personal Equity and Savings Option) Fund is a savings program for all SSS members. Its offers tax-free earnings, and all contributions are sovereign-guaranteed. Meaning, there’s less or even no risks as it is backed by the Philippine government.
Employees, self-employed, voluntary members, and overseas Filipino workers can enroll and start contributing to the program. They can save any time with at least P1,000 and maximum of P100,000 per year (that’s P8,333.33 a month).
Your contribution is divided into three components: retirement, medical, and general purpose. The SSS PESO Fund has different interest on each component, but I went ahead and computed that the your fund would earn 3.085% interest per year. Bearing that in mind, you need to contribute at least P7,106.26.
8. SSS Flexi-fund
The SSS Flexi Fund is open to all overseas Filipino workers as a way to encourage them to increase their savings for retirement. It is managed by the Social Security System (SSS) and offers tax-exempt annual yield as well as annual incentive bonus.
Any Filipinos who have employment abroad can register at any local or international SSS branches. Once enrolled, they can pay any amount in more than their required contribution. Any excess will be credited to the Flexi-fund automatically.
This source says that the annual yield for SSS Flexi-fund is 5.1%. Using this as our rate of return, then you must save at least P6,378.39 for at least 10 years to get your first million.
P.E.R.A. or Personal Equity and Retirement Account is a personal and voluntary savings account available to the investing public who are at least 18 years old and have a tax identification number. It is established by the Republic Act No. 9505 (the “The Personal Equity and Retirement Account (PERA) Act of 2008) to help people save for retirement and develop the country’s capital market.
You’re allowed to open up to five (5) PERA accounts. When you open an account, you are then able to invest in many different investments such as UITF, mutual fund, stocks of publicly-listed companies, exchange-traded funds (ETF), annuity plans, government securities, etc. The fund can’t be withdrawn unless you’re 55 years old and have been investing at least 5 years or deceased regardless of age and contributions.
The returns would depend on the kind of investment that you choose. If you choose mutual fund or UITF, then you may need to either save at least P6,100 for the next 10 years to earn your first million.
10. Exchange-traded fund
An exchange-traded fund (ETF) is almost the same as a mutual fund. It’s invested in stocks of companies that are listed in the stocks exchange such as SM, Ayala, Jollibee, etc. In the Philippines, we have only one ETF, the First Metro Exchange Traded Fund (FMETF).
You can buy an FMETF just like a stock through a broker. In estimating our first million, we’re not going to use the return in the picture below. Instead, we’re going to the computed rate of return for the past 5 years, which is 6.10%.
At this rate, you would need to invest P6,038.31 each month to have one million pesos at the end of 10 years. (We’re assuming no fees, although in reality there will be when you’re buying and selling FMETF stocks.)