Income can be active or passive. A person earns active income in exchange for his or her actions: you do something—you earn income. These are, for example, salary, fees, income from the sale of berries from the garden, etc. Passive one is the income that a person earns over a period of time (up to the end of their life) having made some effort for this once. In fact, this income is the result of personal investment.
There are many possible sources of passive income. We will describe the main ones available in Ukraine.
A deposit in a Ukrainian bank is the simplest thing. You give the bank money for safekeeping (and for temporary use), and it pays interest for this.
Pros: stable income and reliability, as deposits of up to 200,000 UAH in one bank are insured. If you want to deposit more, then it is better to divide the money among several banks.
Cons: low profitability on deposits, the need to freeze large amounts of money for a long time.
For example: as of December 28, the Ukrainian index of rates on individuals' deposits was:
- in hryvnia for 3 months—7.36% per annum, for 12 months—8.98%;
- in dollars—0.4% and 1.05%, respectively;
- in euros—0.25% and 0.5%, respectively.
If passive income is needed not now, but in the future, then you can conclude an agreement for supplementary pension provision with one of the non-state pension funds (NPF). A person makes regular contributions to the NPF, and the latter invests the person's funds to provide additional income. Upon reaching the age specified in the agreement, the person begins to gradually get savings (their contributions plus investment income minus the NPF commission) in the form of a pension.
Pros: profitability can be quite high, since NPFs are allowed to invest in risky, and therefore more profitable projects.
Cons: contributions to NPFs do not fall into the deposit insurance system. If the fund goes bankrupt, you can lose all your savings.
Investments in securities
It should be remembered that the main law of investing in the stock market is simple: profitability is proportional to risk. In addition, playing in this market is much more difficult than putting money on a deposit. Therefore, for serious investments, professional intermediaries are usually needed.
The Ukrainian stock market is still underdeveloped. Practically only three instruments can be considered for personal investments: bonds and shares of the investment funds. There are certainly also Ukrainian companies’ shares. Recently, it became possible to buy foreign stocks as well.
Buying a bond, a person thereby lends money to the issuer for a certain period. In exchange, they are promised a predetermined income. It is earned at the end of the bond's term at maturity. One can also gain additional coupon income—periodic payments. The bonds are issued by both private companies and the government (government bonds).
Pros: low risk, and a minimal one for the government bonds.
Cons: income on safe bonds is small, not much higher than interest on deposits (income on government bonds in Ukraine is now quite high, but their purchase by individuals involves organizational difficulties, and income is reduced due to additional payments). Investments in the stock market are not included in the deposit insurance system.
For example: on December 28, the Ministry of Finance raised 15.01 billion UAH at auctions for placing government bonds in hryvnia. The weighted average rate in comparison with the auction a week ago decreased to 11.21% from 11.67%, the weighted average maturity—to 8 from 13.3 months.
Mutual investment funds (MIF) form portfolios of various securities. One can buy a piece of such a portfolio—MIF’s equity share (for example, in the form of a certificate). The MIF’s funds are administered by the management companies (MC). One can choose the MC on the websites of credit rating agencies.
Pros: one can start investing in MIFs with almost any amount, and the profit can significantly exceed the interest on the deposit.
Cons: investments are not insured, profitability is not guaranteed.
For example: the Ukrainian AMC OTP Capital offers the following MIFs to the individuals:
- OTP Classic—the current cost of the certificate is 4,966.61 UAH, the profitability for 1 month—0.73%, for 1 year310.27%;
- OTP Equity Fund—the certificate costs 1.94 UAH, the profitability for 1 month—minus 2.51% and 18.29%—for 1 year.
Investment life insurance
Having concluded such an agreement, a person regularly (usually once a year) pays the insurance company a pre-agreed amount. The company invests these funds and generates income. At the end of the term, the person gets back their contributions (minus the insurer's commission) plus the accumulated investment income.
The policies of such insurance often include life insurance against various risks. In case of a sudden serious illness, injury, or death, the policyholder themselves or their heirs get the insurance indemnity specified in the contract.
Pros: investment income can be higher than that on bank deposits. In a bad scenario, the person will simply get back a significant part of the money that they contributed.
Cons: the profitability cannot be predicted in advance, and the state does not guarantee the safety of insurance premiums (although it forces the insurers themselves to insure their risks and supervises them).
Gaining income from renting out an apartment is not as easy as it seems at first glance. This process is accompanied by costs and risks. One needs to take into account the expenses: rent, property tax, and tax on rental income. It is advisable to insure the apartment in case of fire, flood and other troubles. The tenants may not pay or damage the property—and it is good if insurance covers the repairs.
Pros: it is possible to gain good passive income. Real estate can very rarely depreciate greatly.
Cons: the risks associated with tenants are high, and taxes and utility bills can significantly reduce potential income.
Investments in other people's projects (in business)
One can invest in other people's projects in order to earn money, such investments are called portfolio investments. Recently, a type of portfolio investment called crowdfunding has become popular. These investments are in new projects and startups. They can "make a hit" and bring in huge income. But in practice, the overwhelming majority of such projects go bust along with the investors' money.
Pros: it is possible to earn significant profits.
Cons: very high risks.
Creating intellectual property
You can gain royalties for your popular work or invention in demand for the rest of your life.
Pros: it is possible to earn substantial income for a long time.
Cons: the need for careful legal registration of your rights, the likelihood of protracted and expensive legal proceedings with performers, co-authors, plagiarists, etc. is high.
Almost all types of passive income are subject to personal income tax (rates may vary) and military duty. In some cases, the amount of taxes on passive income can be reduced through the appropriate legal registration of the process of gaining this income.