Tuesday, August 7, 2012

3 Secrets to Building Passive Income

One day, I came to a realization that there are only 3 secrets to building passive income:
  1. Time: Save as early as you can
  2. Money: Save as much and as regular as you can
  3. Interest rate: Find better than inflation interest rate
The main reason that we want to start saving early is because of compound interest. Assuming that we use the same interest rate, if you save a thousand pesos a month for ten years between the ages of twenty and thirty, you would actually end up with more savings than if you saved a thousand pesos a month between the ages of thirty and sixty. Compound interest makes a huge impact and the longer your money earns interest the more you will have.

There are a lot of products that help build passive income. One particular product that I like is Sun Life's Sun MaxiLink Prime. I like this product because it maximizes my money and answers my fears:

  1. In case of dying too young
    A portion of my premium is placed in insurance so that there's a guaranteed death benefit that will protect the financial security of my family.
  2. In case of living too long
    A portion of my premium is invested in stock and/or bond markets, similar to mutual funds, to make the cash value grow and, hopefully, to fight inflation over time.

Sun Life product description for its VUL product:
Sun MaxiLink Prime is a peso denominated variable life insurance plan (VUL) that provides financial protection PLUS a potential source of savings that can fund future needs like retirement income through its investment earnings. There are 5 funds to choose from where your premium payments will be invested in. These funds are managed actively and prudently by our top-notch investment professionals.

Sun MaxiLink Prime is payable for at least 10 years*

* The premium paying period is not guaranteed. You may be required to pay additional premiums after 10 years if the fund value is insufficient to pay charges. (cases like consecutive years of bad economic situation, delayed payments and skipped payments)

Reference: Sun Life Financial Philippine Website

A sample computation below using Sun Life's products to illustrate the saving period vs age started:
  • A 40 y/o saving 50,000 annually for 20 yrs will accumulate 3.1M at age 60.
  • A 30 y/o saving 50,000 annually for 10 yrs will accumulate 5.1M at age 60.
  • A 25 y/o saving 50,000 annually for 10 yrs will accumulate 8.4M at age 60.
*40 y/o based on Sun Life Prosperity Fund (10% growth); 30 y/o & 25 y/o based on Sun Maxi Link Prime, min. FA + TDB, fund growth at 10%

Start building your passive income to reap the benefits of saving early for retirement. No one else benefits from this except you.