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.
These are 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 reach their financial goals 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.
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?
- Work smart. 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.
- Open multiple income streams. It 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.
- 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.
- Some passive income options are easy. There are ways to earn extra cash that actually require you to put up a big amount of money. When you’re planning to go into rental business, you’d be required to put up huge capital. All of the strategies listed below are really easier to start. They’re all like opening an account in a bank.
What are the risks in passive income?
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.
You can see the list of banks, their high interest rates, and their deposit products. For a more complete guide, please read our roundup of the top 10 best savings accounts in the Philippines.
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.
In addition to regular deposit accounts, banks also offer product for children. You can read more about the best 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.
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. You can read a more detailed article on the best time deposit accounts with high interest rates 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 put your savings in investment funds 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. In fact, you can read more about top 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.
4. Mutual funds
In this list of investment companies that offer mutual funds in the Philippines, you can see that one company actually manages several funds. If you don’t know anything yet, here’s a great beginner’s guide to the best mutual funds and the complete list of the top mutual funds in the market.
Anyone can actually open an account. 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.
Check out the mutual fund fees especially how to avoid paying the sales load before you start because they can chip away your possible returns. 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
UITF or unit-investment trust 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.
Personal Equity and Retirement Account (PERA) 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 can check the BSP PERA info.
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. Or you can also read this article about PERA earnings.
7. 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 a Pag-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 may require you to save at least P5,988.49 per month for the next 10 years. Here’s a guide on how you can maximize your Pag-ibig MP2 savings program.
8. 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.
9. 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.
In fact, I’ve written an article that let shows the earning potential in SSS Flexi Fund.
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.
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 Philippine Equity Exchange Traded Fund (FMETF).
You can buy an FMETF just like a stock through a broker. 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.)
11. Index funds
Index funds are not for the faint of heart. They are invested in the top 30 companies in the Philippines, which are collectively called blue chip stocks or Philippine Stock Exchange index (PSEi) or simply called equities stock index. And because you would be holding stocks of corporations such as PLDT, Jollibee, SM, etc., that are being traded on the stock market, the prices fluctuate every day. So if you’re someone who’s not ready to handle risks, then you may want give it a think.
But what do you give up if you’re not into index funds? Here’s the graph of the local equities stock index since 1988. As you can see, there are periods of volatility (going up and then dipping down), and the general trend is upward.
12. Long Term Negotiable Certificate of Deposit
Long Term Negotiable Certificate of Deposit or LTNCD are debt instruments issued by banks.
LTNCD is offered to the public when banks need to raise capital that would be used to fund expansion or to increase their lending ability to their borrowers. Some of the banks that recently announced that they are offering LTNCD are Security Bank, PNB and China Bank.
What’s more, it’s insured by PDIC for up to half a million pesos and tax-free when the investor holds it until at least 5 years. Here is a sample LTNCD offering by the Security Bank.
Recent update though has indicated that the Bangko Sentral ng Pilipinas would put a limit to issuance of LTNCD by next year. Check this news report from Inquirer.
13. Retail treasury bonds
Don’t you know that you can actually by the debts that are issued by our government? You can do this by acquiring the retail treasury bonds or RTB. These are government debts that are offered to the public by the Bureau of the Treasury. You can actually check http://www.treasury.gov.ph/ for the latest offering.
You may buy them through banks (authorized to sell them) or online directly through the Treasury. On the website, click “Government Securities”, click “Public Offering”, and click either “Treasury Bill Offering” or “Treasury Bond Offering”. For instructions on how to acquire them, check this link.
Investing in bonds on the other hand have longer term, and you earn by the periodic interest that the government gives you. For instance, this RTB no. PIBD0322G247 has a maturity date of July 4, 2022. Its coupon rate or interest is 4.750% annually.
Using the RTB offering number PIBD0322G247, we can fairly estimate your total earnings. Since the interest is known as well the number of years, we can actually check just how much you may possibly gain.
Now before we even start the estimate, it’s important to remember that you would be taxed at 20% for any interest earned. Assuming that you invested P100,000, this is how earnings are going to look like. And since you have 12 quarterly payments (3 years x 4 quarters per year = 12 quarterly payments), then your total interest earned is P11,400. That is, your money grew by 11.40% when the bond reaches maturity date.
14. Corporate bonds
Corporate bonds are debt instruments that private companies issue in order to raise capital. Just like the government bonds, they are interest-bearing and pay fixed income until the debts are settled when they mature. You get periodic interest, usually quarterly (every three months), until the bonds are paid back in full when the term ends. Terms usually lasts about 5 years or longer.
They can be an option if you don’t like to be exposed to risks (such as those associated with owning stocks). Corporate bonds give you priority on company assets should the business be liquidated. When the entire business is sold, you’d get paid first before the stockholders.
There are ways to acquire them. You can subscribe to them during offer period, which is the first time they’re made available in the public that may last for days or a week. Outside of the offer period, you may purchase them through the secondary market or by buying up bond funds.
15. Philippine treasury bills
The Philippine treasury bills have shorter term, between 92 days to 364 days, and they’re sold at a discount. You earn by the difference (called spread or yield) between the price of the bill and its face amount. An example, you may be able to buy a ₱1,000 treasury for only ₱950. The ₱50 spread (1,000 – 950) is your gain, which translates to 5% yield.
Just like other government securities, you may be able to buy the treasury bills through brokers generally in the money market. Check the broker’s commission, yield, and the remaining term.
16. Preferred shares
You can also invest in preferred shares. Preferred shares or preferred stocks are issued by Philippine corporations as one of the ways to raise capital for their business. Unlike common stocks, they don’t give you the right to vote.
However, you’re given dividends first before investors who own common stocks and you’re given prior claim to the business should the company gets liquidated. Dividends are the portion of the profit of companies that they decide to give away to investor. Another key difference is that preferred shares are not as volatile as common stocks. That’s why preferred shares can be an option for passive income.
How do you invest? You just buy the stocks from the stock market. Here’s a list of preferred shares gathered from various sources. If you want to see the dividend rates and other more important details, you may read the article: Is it good to invest in preferred shares?
Just a couple of things to consider. They are not issued very often. It’s also not easy to acquire them because there are not many sellers who are willing to let go of their shares. Another thing is that companies usually redeem (buy back) these shares at a certain period in the future. Lastly, dividends might not be guaranteed, so companies may miss paying out dividends in a given year. Lastly, the price of the stock is subject to market demand and can fluctuate.
17. Dividend-paying stocks
Because preferred shares are offered infrequently, another alternative is to buy company stocks from the exchange. You can choose companies that have historically given out periodic dividends to shareholders. Here are the top 30 largest Philippine companies and the dividends they’ve paid out last year. And here is also a list of Philippine company stocks that gave highest dividends last year.
18. Real Estate Trust Fund (REIT)
Real estate investment trust or REIT is the newest addition to the local securities. It is suitable for people who want to invest in real estate without the much needed huge capital to put up buildings. That is because it is organized in a way that allows the public to own shares of big properties with minimum capital and without having to worry about managing the day-to-day operations.
Tips in getting started with passive income
So how can you get started? Here are some of the things to bear in mind.
- Check your financial health. Do you have steady primary source of income? How much have you saved for your emergency fund? Your ability to invest depends on how solid your financial foundation is.
- Look for more side hustles. Think of other ways to augment your earnings such as a part-time job, a business, or freelance work. The more you earn, the more you have to set aside.
- Attend financial seminars. Most establishments will usually give free seminars for financial literacy. You can learn a lot. Just keep an open mind as they can be designed in a way to position products. Research and decide on your own terms.
- Choose the best passive income. It should be one that suits your particular situation and needs. Check below for our tips on how to pick the one that fits you the most.
- Choose the company. Do you want to go with a bank that you trust? Should you want to open a mutual fund? Make comparisons with other institutions.
- Get more specific info. View their website or drop by to ask for finer details such as documents required, online access, account management, and level of customer care.
- Open the account. One of the things I’ve learned after many years is that sometimes, thinking too hard may stop you from actually doing something. If you’ve already reached a certain level of trust on what you know, open an account and just get started.
- Learn as you go. Along the way, you’d learn more about things that you may not know yet. The more things that you understand, the wider your choices would be in terms of earning passive income. This might lead to more opportunities for you to grow your money.
How to find the best passive income for you
With so many choices, it might be hard for you to choose one to get started with. To help you find the qualities of the best passive income, here are some of the things you can bear in mind. Also, take note that the ones mentioned here are either government-owned companies or licensed by the Philippine government, so you know that they are trusted partners for your wealth-building strategies.
How much initial capital can you invest? This is the starting point because it is going to dictate what type of accounts you can open. In our estimate, investing in securities such as time deposit, mutual funds, UITFs, PERA, and VUL are on the higher end, while savings account, MP2 and the others have low amount required to get started.
The next factor is convenience. You would want to deal with institutions that you can visit any time or have online portal for quick monitoring. Banks that offer savings accounts, time deposits, and UITFs as well as government-owned companies such as Pag-ibig and SSS come to mind. Check if there are other duly-licensed companies near you.
Risks and returns
What kind of investing risks are you willing to take? You know what they say. The higher the risks, the higher the potential for returns.
If you think you are not willing to experience capital loss, then go for guaranteed but modest returns from less risky SSS, Pag-ibig, and deposit passive income. But if you are saving for long term and your income is enough for your living expenses, then you’re maybe more suitable for ETF, UITFs, mutual funds, and VUL.
How much time and work are you willing to put in? This sounds ironic because we’re talking about passive income, but not all of them are created the same. Some would require you to track their gains or loss periodically such as in the case of exchange traded fund (ETF). Others like time deposits do not really need much of your attention.
Are you saving up for medium-term or long-term goals? Or do you want to have access to your money any time? The need for cash (or in technical term, liquidity) limits your choices. Some of these accounts would charge a fee or only give your capital back when you withdraw or close within a specified period of time.
Low fees and taxes
Compare fees involved because they lessen your earning potential. Not only that, check for any tax liabilities on your income as they also can diminish your gains.
In particular fees of investments funds in the Philippines are really high compared to similar products available in other countries. And this is something that the government and the financial industry have to look into if we really care about protecting the interest of the investing public.
Maximizing your passive income
Trust me when I say that you are your worst enemy. Self-control and money management skills are not gifts that anyone is born with, they are developed. And one of the mistakes that I’ve learned early on is that I let my emotions cloud my decision-making.
Don’t be like me. Here are the tips on how you can maximize your passive income.
- Have a financial goal. Be purposeful. Does your wish to have more income is to pay for your kid’s education or buy a vehicle? Your goal will stop you from making the wrong choices along the way.
- Be patient. The way to building wealth is to let money work for you, and that includes letting the element of time in compound interest. This is especially true with time deposits.
- Start small. It doesn’t really matter how much you started with. What matters is what you get in the end.
- Save consistently. The way to go is to go slowly but surely. You don’t have to actually get everything you have all at once. Consistency is key.
- Monitor. Be sure that you get to spend a little time periodically to check on the progress of your accounts.
- Keep learning. Learning never stops. Look for opportunities that may present along the way. Knowledge is power, as the saying goes.
- The figures contained in this article are projections. Actual results vary.
- Past performance does not guarantee future returns.
- Check out the fees as they can potentially take a chunk of your capital or diminish your returns.
- Avoid shiny-object syndrome where you get attracted to the newest investment opportunity that you learn.
- Avoid FOMO or fear of missing out. Just because other people are opening their account does not mean you have to too.
- Be critical. Learn as much, draw your comparisons, and make your own informed decision based on your financial status.