I love these 5 forms of passive income

As much as I love writing for a living, getting paid isn’t my favorite way to make a living. I prefer the freedom of having multiple sources of passive income. Help, this unearned income is used when I am not, both night and day.

Five popular forms of passive income

Here are five types of passive income you can use to increase your income:

1) Savings interest

Cash on deposit usually earns savings interest. But after the global financial crisis of 2007/09, interest rates fell to new lows. Savings interest rates fell, some to zero levels.

With interest rates now rising, some accounts are easily accessible paying 3% a year before tax. This is good news for long-serving British pensioners, whose nest egg has been decimated by inflation (price rises).

2) Coupon bond

Bonds are fixed-interest IOUs issued by governments and corporations. Say I lend money to HM Government by buying UK Gilts. In return, I receive a regular bond coupon (interest payment), with the principal returned in full when the bond matures.

When interest rates are high, high-quality bonds pay small coupons. Thus, my portfolio has been bond-free for years. But with rates rising, I can buy some solid bonds for long-term income.

3) Share dividends

Of all the forms of passive income, stock dividends are my favorite. The majority of unearned income comes from these regular cash payouts. However, not all listed companies pay dividends – in fact, at least.

Also, future dividends are not guaranteed and may be cut or canceled without notice. Dozens of major companies reduced or canceled dividends during the 2020 Covid-19 crisis. Fortunately, almost all members of FTSE 100 pays dividends, making Footsie happy to hunt the ground for its juicy cash crop.

4) Capital gains

Capital gains are profits that I made by selling shares at a higher price than I paid for them. You can generate passive income by selling small stocks at a profit. This is largely the same as collecting stock dividends, but capital gains are taxed at a lower rate.

Say I buy £10,000 of shares which then go up tenfold (+10%) to be worth £11,000. I can sell £1,000 of shares, leaving the original £10,000 invested. As a result, I have sent a 10% ‘pseudo-dividend’ to myself by accumulating this capital gain. And sheltering these proceeds in a tax shelter keeps the taxman at bay.

5) Retirement

While retirement can seem scary and mysterious, it’s just another type of investment pot. The goal is for me to systematically save money throughout my working life. When I retire, I will use this accumulated pot to generate passive income to replace my income. And after decades, retirement investments can yield a handsome pot.

For example, my husband’s pension pot is worth more than my house, because he invested a large part of his income over 33 years. Today, it is one of our greatest financial assets and will generate enough passive income to last us until we die. And in his will, he has given this asset to our children, to help them cope with the costs of modern life!