START THINKING ABOUT PASSIVE INCOME!

One of the more important financial concepts you should know about is 'passive income'.

Passive income refers to income generated through very little to no additional work on your part.

Examples of passive income:

For example, interest on your bank deposits can be considered a passive income. You just put your money in the bank, and it grows, without any need for active involvement on your part.

Other examples include:

* rent from any property you own
* royalties from something that you invented
* earnings from something you created such as writing a book or creating a website
* dividends from your investments (stocks, bonds, and other investments
* earnings from a business that you don't play an active role in running

Why you should start thinking about passive income:

We of course only have so much time in a day, so if we had to actively work at every additional dollar that we earn, we'd be exhausted!

That's why it's important to start learning about how we can create passive income. Read up on investment in property and shares; study the markets to find out how they work, and which income sources provide the most stable, secure forms of passive income, etc. It's never too early to start doing this!

An understanding of how and where to create sources of passive income will help you to be more financially secure.

Make a start today by opening a savings account which earns you interest, if you haven't already done so. Remember the lesson on Compound Interest in previous blog post (Start Saving Early: Compound Interest) where we learnt that the earlier you start, the more you stand to earn?

WHAT'S A BLUE CHIP STOCK?

The term “blue chip stocks” refer to prestigious, well-established companies.

Characteristics of blue chip companies:

• Good record of earnings over a long period of time

• Good record of dividend payments to investors

• Strong financial position; with not much debt in their books
  

• Large in size relative to the market

• Leaders in their field or industry
  

• Relatively stable, solid companies

FAST FACTS

• The term 'blue chip' probably originated from the game of poker, where the chips with the highest value are the blue ones.
  
• Probably the most well-known list of blue chip companies is the Dow Jones Industrial Average, a collection of thirty stocks is selected by the editors of the Wall Street Journal.

Examples of blue chip stocks:

In America: Wal-Mart, Coca-Cola, Berkshire Hathaway.

In Singapore: SingTel, Singapore Airlines, Singapore Press Holdings.

Why invest in blue chip stocks?

Blue chip stocks, because of their stability in terms of growth and dividend payment, are excellent as long-term investments, providing you with relatively stable, secure returns on your investment.

INTERESTING FACT ABOUT INTEREST CALCULATION

Did you know this? Banks vary in the basis on which they calculate interest payments on deposits placed with them.

Different banks in different countries may vary in the number of days they consider a 'year', either using:

• 365-day year (even for leap years)
  
• 365-day year (except for leap year, when 366-day year is used)
• 360-day year

That means that you may actually earn more (or less) interest depending on which bank you're using.


FORMULA FOR INTEREST CALCULATION

Simple interest calculation is based on this formula:

Amount in Deposit Account
MULTIPLIED BY Interest Rate per year
MULTIPLIED BY number of days the amount is placed in the deposit account
DIVIDED BY No of days per year used as basis for calculation (365, 366 or 360 days)


AN EXAMPLE OF HOW MUCH YOU WILL GET USING THE DIFFERENT BASES FOR CALCULATION:

Let's say that we put $100,000 in the bank for 60 days in 2008 (a leap year) at an interest rate of 5% per year, this is what you will get at different banks

BANK A - 365-DAY YEAR BASIS IN 2008
Interest
= $100,000 x 5% x 60 days / 365
= $821.92

BANK B - 366-DAY YEAR BASIS IN 2008
Interest
= $100,000 x 5% x 60 days / 366
= $819.67

BANK C - 360-DAY YEAR BASIS IN 2008
Interest
= $100,000 x 5% x 60 days / 360
= $833.33

WHY CHEAPEST IS NOT ALWAYS WISEST

We have a knife at home that we've used for close to twenty years. And that's still the knife that we prefer to use. It was easily 10x the price of a normal knife when I first bought it.

So, really, the Cheapest item is not always the best when you calculate in terms of how much use you get out of it.

Think about it this way:

I could easily buy a pair of sneakers for $10, but I wear it once, and then throw it away because it's too uncomfortable. Costs me $10 the only time I wear it.

Or I could buy a $100 pair, and wear it 100 times before it wears out. Averages out to $1 each time I wear it.


Great questions to ask yourself when shopping:

How often will I use it?

If it's something you use every day, it's worthwhile looking for something that's of better quality, and will last longer. But if it's something that you may only use for a short period of time, like a pair of sunglasses that will go out of fashion next season, try looking for something which costs less.

Does it have the features I need?

For example, we have a $40 digital camera which we hardly use, because we still print out our pictures, and it doesn't take pictures that are good enough for that. But our $500 camera? We bring it with us everywhere we go!