Filling in the Financial Gaps

How can one create an additional revenue stream from money that isn’t in use? Financial independence can be achieved without any strenuous work by gaining profit from interest. Having a nuanced understanding in the diverse instruments that produce interest can assist individuals in making better choices in maximizing their returns while managing risks.

Fundamentals of Earning Interest Income

The income obtained from the sources mentioned above is often considered to be the simplest and easiest form of passive income. It originates from savings accounts, fixed deposits (FD), recurring deposits, lending platforms, and other financial service instruments. Although common, these sources will not always ensure positive returns when taking inflation and taxes into account.

Reality Check On Fixed Depsits And Savings Accounts

The less marketed aspect of FDs and Savings Accounts are some of the main reasons people are struggling today. These so-called safe “investments” frequently yield unsatisfactory returns, especially when inflation and taxes are taken into consideration. Ultimately causing wealth to dwindle over time.

Risks Involved

The amount of insurance provided in the event of a bank collapse ranges by country and often doesn’t mitigate large damages.

Due to inflexibility, FDs incur penalties in the case of early withdrawals greatly reducing the overall gains.

Seeming Safer Options

Liquid Funds: Safest Choice

Liquid funds, which are low-risk mutual funds, are distinguished by their focus on diverse financial instruments. They allow for earlier withdrawals than Fixed Deposits. They also yield over 10% returns which makes them seeking greater returns preferable.

Advantages:

• Not penalized for early withdrawals.
• Income tax for individuals is fixed 10%.
• Minimized risks through diverse investments.Example:

In liquid funds, yields 2019 recorded were around 5.03% which was a significant growth compared to the FDs which had resulted over the years.

Non-Convertible Debentures (NCDs) and Bonds

Those who want better yields without too much hassle can always look forward to NCDs. Bonds and non-convertible debentures fall under this category which cover both government and private insurance companies and their returns, risks and varying degrees of returns under each category.

Key points:

More returns than those in the general NCDS.

Lower returns than private but safer government bonds.

Depending on ones financial objectives, tax-free bonds can also come in handy.

The Private Lending Problem

While private lending to the community base is an appealing concept, it is ridden with risks. The payment of principal and interests is usually under mutual trust with no supervision, making it a poor approach to passive income.

A Strategic Action Plan

• Make use of the Interest Model for passive income generation
• Asset Evaluation: Estimate the total value of all cash and fixed-income accounts.
• Set aside critical cash reserves: Withdrawal of money market funds accounts and certificates for a value equal to three months of expenses is advisable in case of emergencies.
• Portfolio Management Re-allocation: Invest into mutual funds, NCDs or other Bonds.
• Do not redeem investments prematurely: Cash liquid certificate of deposit are for use in times of real financial emergencies.