Why You Should Not Depend On Active Income & Fixed Deposit

If you ever read the book called Rich Dad Poor Dad by Robert Kiyosaki, you know our world is made up of Employees, Self-Employed, Business Owners and Investors. The difference between them is how they position themselves to take advantage of time and money. The picture below illustrates their distinct characters;

Most individuals are in the “Employee” and “Self-Employed” quadrant. For individuals that are in the “Employee” quadrant, they basically work for a company and trade their time for money. So, if they want to earn more money, they must put more hours into their work. In other words, if you don’t work, you don’t make any money.

As for those that are in the “Self-Employed” quadrant, they still trades time for money. There’s a saying, “you own your own business, but in reality, the business owns you”. This means that they still have to put in efforts and time to earn a living. However, we only have 24 hours in a day and so there is a limit to how much they can earn in a day. This is also known as active income.

Secondly, the “Business Owner” quadrant. A business implies you have a system in place such as having others working for you as employees. You aren’t selling your time for money, but rather selling a product or service. In other words, you don’t have to be working for the business to generate income.

Lastly, the “Investor” quadrant. This is where you truly have passive income through investments in stocks, bonds, and real estate that generates you stable annual cash inflow. These are the investments that will allow you to retire and have a long (5-10 year+) timespan in payouts.

In short, Robert wants to highlight that there are two types of income which are:

Active Income = You work for money

Passive Income = Money works for you

So, how to change our income stream from active to passive?

Fixed Deposit as Passive Income

The truth is that everyone already knows what passive income is and how to create passive income stream. One of the way is through investment in Fixed Deposit (“FD”) which generates you some returns/ cash inflows in the form of interests. But given that how money revolves around us, we cannot ignore the fact that there is inflation and it acts like a ‘silent killer’. Inflation literally means the value of your money gets smaller from time to time.

Let’s look at how your FD fares against the real inflation in Malaysia.

Our favorite Malaysian food roti canai cost around RM 0.70 in year 2003. In year 2018, it is about RM 1.60. Meaning, the price of the roti canai has increased at about 5.7% (inflation) per annum for the past 15 years.

I believe this is the real inflation; we as the consumer are facing. However, how does this relates to FD?

FD rate usually hovers around 2.8% – 3.4%. If you were to invest your money in FD expecting it to generate passive income of 3.4% and the inflation is around 5.7%, the total value of your money is decreasing. It’s a bad sign because inflation is diluting all your returns in FD without you noticing it!

(Source: Trading Economics)

What about your Employees Provident Fund (“EPF”)?

People often thought that relying on their ONLY retirement fund (i.e. EPF) will adequately hedge against the inflation. Let’s take a look at EPF 20 years historical dividend rate since 1998 – 2017, their average 20 years return as of 2017 is 5.7% per annum. So, the question to ask is whether your money in EPF is working hard enough for you? Yes, it does but not hard enough because the returns are almost the same as the real inflation rate.

(Source: Malaysia EPF Website)

What do we do?

At the very minimum, our passive income returns should at least be higher than the real inflation rate of approx. 5.7% for us to consider that “our money is working hard for us”. So how do we generate passive income that is higher than our current inflation rate, now that both FD and EPF were unable to give a higher interest/ dividend rate than 5.7%? There are many ways that could generate you higher and stable passive income such as investing in real estate and collect rental income.

There is also income investing in stock market which we at Stocks Insights preferred method as it requires minimal amount of capital to get started. One could start investing into Malaysian listed companies that pays a stable and increasing dividends for as little as RM1,000.00.


This is not to say that you should simply buy companies that pays you high dividend. There are some degree of analysis needs to be done to sift out companies that not only pays you high dividend but are able to increase the payment every year. This means your passive income will increase every year as well.

An equity investor and co-founder of Stocks Insights. Prior to this, he was attached with an International Bank in Private Banking segment serving sophisticated high net worth clients. He has also passed Certified Financial Planner's examinations during his engineering undergraduate degree.

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