How to Create a Passive Income Safety Net
It’s bound to happen where you delivery a project and another doesn’t start or hasn’t come through yet. What do you do in those times as a Freelancer? Are there ways you can supplement or diversify your income for those times you’re between jobs?
Let’s cut to the chase. There will be times when a client drops off, or a contract is delayed or you just don’t have enough work in the pipeline to be gainfully employed 100% of the time. So what do you do during those weeks and months?
Most freelancers and if you’re like me, would have thought about the worst case scenarios (financially anyway). It would mean that I’ve considered the possibility of not having a contract and even the possibility that the current contract I’m on will abruptly end.
Weathering the Storm
This means, making sure I have a rainy-day fund (there are a lot of weather-related metaphors, so bear with me). The general rule-of-thumb from most Financial Advisors is around 3-months’ worth of living expenses. That is inclusive of everything:
- Loan Repayments
- Subscriptions of any kind
- Discretionary Expenses
- Anything else I couldn’t think of but you regularly purchase
That way there will always be a silver-lining (okay that’s pushing the weather metaphors too much). Being able to keep a rainy-day fun is essentially for everyone, but critically important for us freelancers who generally have an irregular paycheck.
The best place to put a rainy-day fund is in an interest-bearing savings account, so you have easy access to it, but it’s not just sitting there doing nothing. Of course, there are tax implications so consult your accountant on those individual tax issues and implications. The key is also to set it aside, far enough away that it isn’t super-duper accessible. You’ll likely be temped to use those funds for a nice vacation or a nice purse but DON’T DO IT.
So what I’ve done is I’ve set up a bank account at a no-fee savings account away from my main expenses. This way I automatically put money in there and set it aside. That way it decreases the changes of me dipping into it whenever I see it.
Investing for Income
When it comes to investing and money in general, theses seem to be taboo topics the make us cringe. Of course, investing any money is very tough because you have to HAVE some money in the first place in order to invest it properly. So once you’ve set up the rainy-day slosh, you can start to think about the extra money that’s coming in — what do you do with it so that you can weather the troughs in your freelancing business?
There generally 3 ways you can invest for income:
- Dividend-Paying Stocks
Generally, those are most easily accessible types of income vehicles. Of the 3 of them, REITs tend to have the highest yield is more likely than the others to pay on a month-to-month basis. REITs generally have a payout between 3% to 15% of the amount you invested.
To REIT or not to REIT?
So what are REITs? REIT stands for Real Estate Investment Trust. I don’t pretend to know the full details of it, but it essentially is a way for individual investors to purchase the trust on the stock market and own a piece of the management company. The management company / REIT is the one that purchases and/or leans money to people who buy real estate like houses, office buildings, etc.
Again you should always consult your Financial Advisor or equivalent professional so I’m only talking about my own experience and my own choices have been. As my contract approached its end, I used some of my savings to purchase a small amount of REIT trust/stock.
There is no real guarantee the REIT management will payout the monthly income for any given month, but so far I’ve been lucky the the past income performance has continued. The REITs I’ve selected had a payout between 7% and 9%.
So, let’s take 8% as the average. If you invested $5000 into a REIT with an indicated yield of 8%, what does that amount to?! Let’s see here: $5000 x 0.08 / 12 months = to roughly $33.33 per month!
To me that’s something that can support my wireless phone bill every month! That’s got a long way. Again no guarantees there as the REIT managers declare their distributions only a month or a quarter ahead, but you can certainly count on the recurring nature of these investments to provide a passive income.
It’s a viable option for many that don’t have too much put aside and it gives you some flexibility when you are in between jobs as a freelancer.
Real Estate In General
Of course if you had even more disposal funds sitting around, you can move up the ladder and be the managers of real estate properties yourself. Finding income properties and growing that portfolio is a niche many people are talking about including many good podcasters.
But for most of us with a small amount of disposal savings to use, REITs may be a good option. It has been for me, especially with the lull between jobs.
There are some great articles and books on how to best invest in REITs.