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Personal Finance

How to shift your livelihood from active to passive income (Part 2)

One way to truly achieve total financial freedom is to transfer your livelihood from active to passive income.

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…continued from last week’s article and you can read the first part here

2.The Active-2-Passive Income Conversion System

The only way to move your life from active income to passive income is to build a passive income that overtakes your active income. To do this there are two steps you need to take. The first step is to determine the percentage of your current income that you want to convert to passive income. And the second step is to know the resources you need to build a solid passive income. Below I explain each of them in detail.

i. Determine the Percentage of active Income you want in Passive Income

The ultimate passive income goal is to convert 100% of current active income into passive income. The problem is only a few people can achieve this from the get-go. Thus the goal is to take a certain percentage of your current active income that you can comfortable converting to passive income. And build it up to 100% from there. We usually recommend that a person starts with converting 30% of their active income. And then build that up to 100% if they can. Not everyone can build 100% of their active income in passive income. Thus there are two types of passive income to build. The first is Necessity Passive income. This is passive income that can take care of basic necessities. And constitute 50-70% of your current income or whatever your current expenses are. And the second type of passive income is the Lifestyle Passive income. That is passive income that can sustain your current living standard. And constitute 100% of your current income. To build necessity passive income you need cash reserves of about N1.5m-N3.5m per Year. And to build lifestyle passive income you need cash reserves worth 3.6million -7million each year. The goal here is, to begin with what you can and build that up over time.

ii. Know what You Need to Build Solid Passive Income

You need five things to build a solid passive income. And these five things are all critical for your passive income journey. The first is Motivation. The second is a safe investment pathway. The third is start-up capital. The fourth is Investment vehicles. And the fifth is mentoring.

  • a. Motivation

No one just wakes up and wants to embark on a passive income journey. People build a solid passive income when they have the right motivation to do so. Whether this motivation is achieving total financial freedom. Retiring early. Having peace of mind in retirement. Pursuing passion, or funding a business. You must recognize your motivation and stick with it.

Having a strong motivation will help you stay focused on your dreams and will make it easy for you to prioritize your passive income goal. Remember, only top priority goals get achieved. And you must value your own freedom enough to want to sacrifice for it.

Read Also: Smart ways to invest in real estate

  • b. A Safe Investment Pathway

There are two paths to building a solid passive income. These two pathways involve trading speed for safety and safety for speed. The first pathway is the Risky Investment Pathway. This pathway trade safety for speed. It chooses investment vehicles that produce high returns in a short time but have a high chance of losing your money. It is sometimes called the “Maybe” investments. And is common with average and poor people looking for quick wins. If you are ok with losing some part of your money. And going up and down in life a few times. Then this pathway is for you.

The second pathway is the Safe Investment Pathway. This pathway trades speed for safety. It chooses investments that preserve invested capital and produces high returns over a longer period of time. This pathway is common with the wealthy and those with a wealthy mindset. If you value peace of mind and economic safety. This is the pathway for you. Choosing speed over safety or safety over speed is a decision you must make throughout your investment journey. But the worse time to choose speed over safety is when you are just starting out. It rarely pays off.

  • c. The Startup Capital

Every passive income investing requires start-up capital. That is the amount of money you need to set up a solid asset base. This amount can be big or small depending on the percentage of your active income you want to convert to passive income. Typically a cash reserve of N1.5m-N3.5m is appropriate for creating the necessity passive income. And N3.6million – N7million is appropriate for Lifestyle passive income.

  • d. The Passive Income Investment Vehicle

There are broadly two types of Passive income Investment vehicles. The first is the Hands-off Passive Income Investment vehicle. And the second is the hands-on passive income investment vehicle. The hand-off passive income investment vehicle is any vehicle that once set up can run on autopilot. This means that these investment vehicles do not require ongoing maintenance and investments to thrive. Once set-up, investors simply enjoy ongoing passive income cash-flow without stress.

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The hands-on Passive income investment vehicle on the other hand requires ongoing maintenance and investments to thrive. That is you need to occasionally infuse cash into them to keep them going. The key to passive income success is to have both the hands-off and Hand-on Investment vehicles working for you.

  • e. A Passive Income Mentor

When you are trying to achieve a goal for the first time one of the smartest things to do is to get someone who has experience in that area to guide you. So if you are not yet familiar with passive income investing, chances are high that you need some help. This is where your passive income mentor comes in. The role of your mentor is to help you kick start your passive income investments. Keep you focused on your journey. And Guide you until you achieve your passive income goals. With this kind of guidance, you are sure to skip through mistakes. Be protected from adverse market conditions, and achieve your passive income goals with speed.

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So these are the five things you need to build a solid passive income.

Now that you know what you need to build solid passive income. Let’s now look at the final component which is the Passive income time wasters.

3.The Passive Income Time Wasters

There are certain activities that waste, delay and postpone your passive income goal. Below are a few of them.

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i. Looking for a Magic investment List

The most common request I get from people looking to invest for passive income is this. Grace, send me your investment list. First, I do not send any such list because such a list does not exist. Different people need different lists so why maintain a generic list for everyone. Besides all the investment list you need is out there in the open. The problem is you cannot make sense out of them.

Since 6000 years ago the traditional investment list has pretty much remained the same. They are no exclusive list for anyone. And everyone including Google draws from the same list. The only new investment that has shown up in the market since then is Cryptocurrency which is still struggling to gain mainstream acceptance.

So rather than look for a list look for an effective investment strategy. The secret is to a solid passive income is the creativity of an investment strategy. And the ability of an advisor to develop sound investment strategies. And apply these strategies, to the right investors and at the right time.

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ii. Investing under financial pressure

The tendency for most people who have small savings and want quick returns is to look for high-risk investments that can produce quick returns. While this may seem like a quick plan, it never really works. These investors end up losing more money. And it may take some 2 or 3 times losing money to get the message. Investing under pressure is a big time waster

iii. Not having a Freedom plan

The only way to build solid passive income is to have a freedom plan. That is an investment plan that actually leads you to freedom. What most people have is an investment plan that leads you to returns. Especially erratic returns that you cannot depend on. This kind of plan only benefits the investment company and not you. To achieve financial freedom, you must work with a Freedom plan and focus on investing for financial freedom.

iv. Eating investment proceeds while still building a passive income.

A lot of people invest but only a few make meaningful progress. The majority of people go in investment circles. They invest eat the investment proceeds. And repeat the process all over again next year. You can never build solid passive income this way. To build solid passive income you must focus on reinvesting your proceed until you establish your passive income.

v. Postponing the work until the last minute

Building solid passive income takes time, discipline, and commitment. And the only way to build it cheaply is to start on time. Most people leave passive income planning until the last minute. After all else has failed. This is why we still have a large population of broke investors in retirement. If you leave passive income planning until the last minute. Chances are high you would not make it. The smart thing to do is to build your passive income first and then you can pursue other goals.

The truth is the only way to achieve total financial freedom is to transfer your livelihood from active to passive income. And the passive income that can set you free is the economy-protected passive income. To build this kind of passive income you need cash reserves. So if you have cash reserves and want to kick-start your passive journey, send an email to [email protected]


About author

Grace Agada is a recognized leading Financial Expert on Nigerian Soil. She is a Renowned Speaker, Author, and Column Contributor in Punch Newspaper, This Day Newspaper, Vanguard newspaper, Business Day Newspaper, Leadership Newspaper, The Tribune Newspaper, and Online Platforms like Nairametrics, Proshare, and Bellanaija. Grace is the author of “The Multiple Income System, “The Passive Income Investing System”, and “The Wealthy Business Blueprint”. Grace is on a mission to raise the next generation of Wealth Creators who are passionately creating wealth for themselves, their families, and the nation. Grace has been featured on BBC Africa. Business Day TV. Inspiration FM. and inside Naijatv. And has consulted for Numerous Top Organizations, Company Directors, Senior Executives, and Top performing working Professionals.

3 Comments

3 Comments

  1. Emmanuel

    February 25, 2021 at 3:24 pm

    At the end, what passive income instruments do you suggest?

  2. Awota weekse

    February 25, 2021 at 4:46 pm

    I am so pleased to read through your investment ideas

  3. Francis

    February 27, 2021 at 4:28 pm

    You never mentioned what passive income instrument one will invest in after building the cash reserves of 1.5m or 3.6m for either necessity or lifestyle passive income as the case maybe.

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Personal Finance

5C’s of creditworthiness: What lenders, Investors look for in a business plan

Business owners need to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.

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Five things to consider before securing a loan

Banks usually are not a new venture’s sole source of capital because a bank’s return is limited by the interest rate it negotiates, but its risk could be the entire amount of the loan if the new business fails. Once a business is operational and has an established financial track record, banks become a regular source of financing.

For this reason, the small business owner needs to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.

Will the business that an entrepreneur actually creates look exactly like the company described in the business plan? Of course, not.

The real value in preparing a business plan is not so much in the finished document itself but in the process it goes through – a process in which the entrepreneur learns how to compete successfully in the marketplace. In addition, a solid plan is essential to raising the capital needed to start a business; lenders and investors demand it.

Lenders and investors refer to these criteria as the five C’s of credit.

READ: 5 ways to raise funding for your business

1. Capital: A small business must have a stable income base before any lender is willing to grant a loan. Otherwise, the lender would not be making, in effect, a capital investment in the business. Most banks refuse to make loans that are capital investment because the potential for return on the investment is limited strictly on the interest on the loan, and the potential loss would probably exceed the reward. In addition, the most common reasons that banks give for rejecting small business loan applications are undercapitalization or too much debt. Banks expect a small company to have an equity base investment by the owner(s) that will help support the venture during times of financial strain, which are common during the start-up and growth phases of a business. Lenders and investors see capital as a risk-sharing strategy with entrepreneurs.

2. Capacity: A synonym for capital is cash flow. Lenders and investors must be convinced of the firm’s ability to meet its regular financial obligation and to repay loans, and that takes cash. More small businesses fail from lack of cash than from lack of profit. It is possible for a company to be showing a profit and still have no cash – that is, to be bankrupt. Lenders expect small businesses to pass the test of liquidity, especially for short term loans. Potential lenders and investors examine closely a small company’s cash flow position to decide whether it has the capacity necessary to survive until it can sustain itself.

READ: How to scale as a small business on a budget

3. Collateral: Collateral includes any asset an entrepreneur pledges to a lender as security for repayment of a loan. If the company defaults on a loan, the lender has the right to sell the collateral and use the proceeds to satisfy the loan. Typically, banks make much unsecured loans (those not backed up by collateral) to business start-ups. Bankers view the entrepreneurs’ willingness to pledge collateral (personal or business assets) as an indication of their dedication to making the venture a success. A sound business plan can improve a banker’s attitude towards venture.

4. Character: Before extending a loan or making an investment in a small business, lenders and investors must be satisfied with an entrepreneur’s character. The evaluation of character frequently is based on intangible factors such as honesty, integrity, competence, polish, determination, intelligence, and ability. Although the qualities judged are abstract, this evaluation plays a critical role in the decision to put money into a business or not.

READ: 7 Ways to pay for your higher education

5. Conditions: The conditions surrounding a funding request also affects an entrepreneur’s chances of receiving financing. Lenders and investors consider factors relating to a business’ operation such as potential growth in the market, competition, location, strength, weakness, opportunities and threats. Another important condition influencing the banks is the shape of the overall economy, including interest rate levels, inflation rate, and demand for money. Although these factors are beyond an entrepreneur’s control, they still are an important component in a banker’s decision.

The higher a smaller business scores on the five C’s, the greater its chances of receiving a loan.

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Written by Chukwuma Aguwa

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Personal Finance

Don’t be fooled by COVID-related scams

Always consult the institution in charge of health-related matters to confirm any fishy information you come across.

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The nature of and the manifestation of the Covid-19 disease is such that there’s only a little time available to remedy the situation before it gets chronic. Although the infection begins by exhibiting mild symptoms, if you do nothing in a short time, it could lead to death in a matter of days.

This whole picture has caused many to become desperate about Covid-related issues, launching into panic mode at the sight of any information. As a result, such people are not far away from falling for fraudsters.

With the different kinds of news flying around, you mustn’t be fooled by Covid-related scams.

The Coronavirus threatens the health of millions of people around the world daily, also killing thousands along the way. To curb the spread and remedy the situation, bodies like the CDC, WHO, and every country’s local health organisation like the NCDC, frequently circulate information around communities. However, it has also led to fraudsters taking advantage to provide fake news, and even asking for donations.

Each day, there seems to be a new account or NGO asking for donations into the health sector, and though some are legit, many are just fraudsters posing to take advantage of innocent citizens. So far, numerous complaints about scams have been recorded, especially with people who are looking to support the health cause in any way they can.

READ: Africa to spend $9 billion on Covid-19 vaccine, access to supply is big problem

Channels used for COVID-related scams 

There are three major ways scammers take advantage of the haziness of the situation to dupe people. To start with, they appeal to the emotions of humans, who see the high death toll and suffering. As a result of what is happening, people have been willing to donate funds for medical supplies, isolation centres, and financial compensation for medical workers.

Scammers take advantage of this by posing as charity organisations and solicit for funds. Most times, as soon as their target is met, they clear their footprint without leaving a trace behind.

Another way they scam people is by manufacturing and selling fake or low-quality health products. Everyone wants to get their hands on a cure, or something that can at least protect them from the virus, and scammers are meeting their needs by providing just that.

READ: China joins WHO vaccine programme as it fills huge gap left by United States

The World Health Organization currently approves only one vaccine, and any other thing outside it is outrightly fake or just a supplement that will help your body. Currently, only the Pfizer vaccine is clinically tested and approved to work. Be sure to not throw your money in the wind by purchasing some of these fake drugs around.

Lastly, scammers create systems to extract a patient’s personal information, thereby having access to the person’s true identity. It could be in the simple form of opening a registration portal where you supply all your details.

Therefore, only give information to approved bodies and not any random online site that appears legit. These fraudulent individuals can do a lot of damage to your identity. Stay vigilant, only communicate with approved bodies, and always ask questions if you are not sure or suspect foul play.

The place of electronics in COVID-related scams

These fraudsters usually reach out to you through the digital sphere. Hence, watch out for cold calls, text messages, or emails requesting donations to certain bodies. The best way to confirm the legitimacy of such a message is to visit the organisation’s official website in a different browser. Never follow the link in the mail or text directly, as it can be easily embedded with spyware. Therefore, a single click could see them extract all your personal information, including bank details.

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Also, please stay away from those who claim to have a cure, and accompany it with testimonies of people who have used it. They are low graders desperate for your money. Vet them by searching online and see what people are saying. In all, always look out for suspicious messages, and opt out if you are sceptical.

In a nutshell, you should not believe any cure, vaccine or supplement that the World Health Organization does not approve of.

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Conclusion

The government or legit health institutions do not cold call citizens to request donations or coerce them into making one. If you receive a call out of the blues, chances are it’s a scam, which is why they mostly try to hurry you to donate before you realise it. Always consult the institution in charge of health-related matters to confirm any fishy information you come across.

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