Read Part 1 Here: Not-pension 1
In part one of this article I showed that 'having a pension' shouldn't be our aim if we seek some sort of financial security in our dotage, the aim should simply be to have income-producing assets that cover our cost-of-living.
The first thing to do is estimate how much money you need every month. This is only a rough estimate of course. Working out how much you are spending in a typical month is an easy way to do this. Now we have a target to aim for!
So, let's assume it is $2000 a month. Now we need to work out how to get that. At the moment you are selling your time to get this money, this needs to change so that you have income-producing assets that give you this money.
We can attack this problem from two directions.
Firstly: reducing the amount of money you need each month. The less you need, the easier building a passive income will be.
Secondly: Building up those income-producing assets.
One popular way of building-up these assets is investing in the stock market. Today I see that the FTSE 100 (The UK's 100 largest companies) pays an average yield of 3.5%. In other words, if you invest $100 in these, then in a years time you will have earned $3.50 income (irrespective of the fluctuations in shareprices). So next year you have $103.50, you add another $100 & your income for year 2 is: $7.12.
You have made a start at building that passive income, & here we see one of the most powerful tools to help us grow our passive-income...compound interest. They say there are two types of people in the world, those that PAY compound interest (anyone that doesn't pay their credit cards off every month) & those that EARN compound interest.
There are reports produced every year that compare various different asset classes (cash, bonds, shares, real estate) against each other & they illustrate starkly the value of compound interest. A $100 invested in shares or real-estate & JUST LEFT THERE compounds year after year until the returns are greater than $100 every year.
The secret is... just let the money to grow... don't try & trade (buy & sell), there are no 'secrets'...just lots of people trying to seperate you from your money.
In part 3 we'll discuss two popular asset classes, equities (shares) & real estate.