The two ways you should be making money to survive a crisis
The COVID-19 pandemic has been a reminder for many Australians of the dangers of relying too heavily on any single source of income. They may have lost jobs, had their working hours cut or seen once-dependable investment income streams suddenly disrupted.
The 2020 dividend drought has impacted investors, including self-managed super funds, who often rely on income from blue-chip share portfolios, because many large companies have been forced to cut distributions in order to conserve cash.
During the 2020 reporting season, shareholders in Commonwealth Bank saw payouts fall by more than half compared to last year, while several of Australia's largest companies such as Aristocrat Leisure, Ramsay Health Care and Scentre Group scrapped payments altogether.
Just as a diversified portfolio can reduce your risk of capital losses by spreading investments across different asset classes, diversifying the sources of your income can reduce the chance that any one event or downturn in any one sector can severely impact upon your lifestyle and financial position.
Having a range of active and passive income sources can minimise your reliance on any one employer, client or investment. Here, active income refers to income received from performing a service and includes wages, commissions and income from businesses in which you materially participate. Examples of passive income include rent generated by an investment property, dividends received, or interest earned.
Active income sources
If you're looking to build wealth or create a buffer against unexpected emergencies by enhancing your active income, there are many options to explore that don't necessarily require you to commit to formal employment or to making a major investment in a business venture.
For those with a marketable skill set, consulting and freelance services are flexible ways to generate active income. Or you could consider creating and selling your own products (Etsy.com is a popular option), reselling (perhaps on eBay or Gumtree) or gig work such as driving for a ride-share company.
Because earning active income requires a constant application of time and energy, finding reliable sources of passive income becomes increasingly important as we age and transition towards retirement.
Passive income sources
Once you reach your super preservation age (between 55 and 60, depending when you were born) you may be entitled to an account-based pension, which offers a regular, flexible and tax-effective income stream from your superannuation. And as a retiree aged 66 or over, you may also be eligible for the Age Pension provided you meet certain criteria, including income and assets tests.
For those with additional funds to invest, rental properties can generate consistent passive income streams. However, when it comes to finding investment options that are good passive income sources and are also liquid, today's low-yield environment is making things increasingly difficult for investors.
High interest-bearing accounts such as bank savings accounts and fixed-term deposits, for example, were a cornerstone of many a retiree's passive income stream in years gone by, but today returns on offer are very different.
Another option is real estate investment trusts. Though there are different risks to consider specific to real estate investment trusts, they have historically offered a higher return than bank savings accounts and term deposits.
Many aim to provide investors with regular income from a diversified pool of property assets. Some trusts may target a specific asset class such as industrial assets only or may only invest in the debt component of one or many properties.
Alternatively, a fund or a trust may purchase a singular or multiple properties using a combination of equity and debt with the dual intention of providing income and also potential capital growth over the longer term. An example of a trust focused on debt only property opportunities is a mortgage trust, which lends money to the developers of real estate assets in return for interest that is charged on the finance facility provided.
When it comes to choosing the right mix of active and passive income sources, we recommend seeking advice from a licensed financial adviser to ensure you aren't overly reliant on any one source of income and help to provide peace of mind and the confidence that you can maintain your lifestyle in today's uncertain economy.
Learn more about investing in Trilogy's range of mortgage trusts, diversified income funds and property trusts.
This article was prepared by Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) and does not take into account your objectives, personal circumstances or needs nor is it an offer of securities. Application for investment in the relevant product can only be made on the application form accompanying the Product Disclosure Statement (PDS) available at www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy, involve risk which can lead to loss of part of or all your capital or diminished returns. Trilogy is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed adviser to conduct an analysis based on your circumstances. Investments with Trilogy are not bank deposits and are not government guaranteed.