If you feel that working for a living involves a little too much work, passive income is something you’ll want to explore. Unfortunately, when most people think of a passive income stream, they get bogged down by visions of billion-dollar hedge funds or million-dollar real estate portfolios.
Truth is, earning passive income has never been easier—and you don’t need a huge initial outlay of money to get going. Start right with the wizards from MoneyWizard.co and join us as we explore some passive income options.
What is Passive Income?
Passive income is just what it sounds like—earnings you receive without necessarily being actively involved in the endeavor that generates them. Unlike active income (which is what you earn from your regular gig), passive income has no ceiling, since you don’t have to worry about the time constraints to generate income. Besides, you’re not paid based on how much time you put in or the amount of work you do.
Think about the interest you earn on your savings account. You earn in the form of interest in exchange for parking your funds at a bank. However, not all forms of passive income are this passive—some require a significant investment of resources and time up front.
Passive income is usually taxable, but the manner in which it’s taxed depends on various factors. For instance, investment income may be calculated and taxed differently from property rental proceeds or cashback credit card rewards.
What Are the Best Ways to Earn Passive Income?
“Make money while you sleep” is the biggest draw that entices people to earn residual income. You can write an eBook, start a blog or online store or create videos that generate income when you’re not actively engaged with them. Or you can own stocks or property that let you earn passive income. Ultimately, you might have to choose between passive income ideas that require an initial cash outlay and those that don’t.
Passive Income Ideas Requiring an Upfront Monetary Investment
Try Out Index Funds
Index funds are relatively lower-risk investments designed to align with a designated financial market. If you invest in an index fund that’s based on the S&P 500, you’ll be putting money in the general market without having to worry about picking specific investments, knowing when to buy individual companies or rebalancing your portfolio.
Each aspect is handled by the fund that based the portfolio on the composition of the underlying index. You can pick a fund that’s based on any index you like. For instance, there are index funds created for every market sector, including banking, precious metals, energy and more. Just decide where you want to participate, make your upfront investment and relax. Your portfolio will create some automatic cash flow. And the best part? Many index funds are “no load” funds, meaning you do not pay any kind of sales fees, and most have very low management fees.
Invest in Real Estate
When you think about investing in real estate, you may picture yourself as a landlord who chases down tenants for rent or repairs. However, there are a few ways to invest in real estate with a lower time commitment.
Real Estate Investment Trusts (REITs) are companies that are involved in the investment of income-producing real estate, ranging from commercial properties to storefronts and rental properties. The law requires that REITs pay out at least 90% of their rental income profits to investors, although most look at a 100% payout to attract high-value investors. This implies that REITs usually have higher dividend payouts compared to ETFs or bonds.
If you choose to buy a rental property and become a landlord, you’ll have to spend some time managing the property. You should also limit your legal and financial risk by choosing a property that doesn’t involve massive renovations. Buying smart is key to being successful with rental properties. Not every property will provide a good return or prove to be as passive.
Invest in a High-Yield CD
A certificate of deposit provides an excellent low-risk, long-term passive investment option. A Certificate of Deposit (CD) account is typically available at your bank or credit union, and similar to a savings account, you can earn some interest in money deposited. You will earn an interest leaving your deposit untouched for a certain period—as little as six months or up to five years.
You can make the most of your CD account by choosing an online bank with the highest CD rates. Besides, long-term CD accounts usually pay more than shorter-term ones. You’ll pay an early withdrawal penalty for cashing out before the maturity date. And with CDs, you can rest easy—your initial investment principal is safe provided your institution is backed by the Federal Deposit Insurance Corporation (FDIC).
Dividends are a kind of profit-sharing through which corporations make regular payments to their shareholders. While it isn’t mandated by law, corporations choose to pay their stockholders a share of their profits as a cash option or through a reinvestment plan. Dividend stocks can provide passive income with a higher annual rate than what bank investments provide.
Dividend stock investing may be risky if you don’t know what to look for. If you’re still a rookie, you’ll want to consider large corporations with a long history of financial stability and low volatility. You can then purchase your dividend-paying stock through a brokerage or directly through the company.
Pay Off or Reduce Debt?
While it doesn’t seem like a passive income opportunity, clearing your debts may be one of the best investments you make. The interest on accrued debt racks up fast, and retaining more of your own money is a great boost to your residual income.
Easy Passive Income Ideas
If your available money and time is limited, here are some easy passive income opportunities that are easy to implement.
Cashback Rewards Cards
The idea of generating some income by spending money may not sound like the best idea. But in reality, you eat, drive and pay bills no matter how frugal you are. You’re missing out on a simple passive income source if you’re not using a cashback credit card. There are different types of credit cards, but typical cashback rewards cards pay 1% for all purchases and up to 5% for category-specific purchases like gas or groceries.
Cashback sites are an incredibly simple income idea. Rather than walking into a shop, you access a retailer’s online store via a link from a cashback website. You’ll not only get your item from the retailer but also some money from the website, usually a percentage of the price you paid. Cashback sites have links to retailers of everything from toiletries and groceries to broadband deals and insurance policies.
Can Passive Income Build Wealth?
Yes! Passive income can help you continue to build wealth. You could start by leveraging your time and effort to create income streams that grow into the future. You can then use the accumulated money to generate more passive income.
How Many Streams of Income Should You Have?
There’s no rule of thumb when it comes to the number of income streams you should have. Obviously, the number of sources of income you have will depend on your current financial situation and goals for the future. Having a few will probably be a good start.
Cultivating passive income will take some active research and, often, more than just a little work. But the payoff may be significant. Having a source of income that isn’t dependent on contracting or employment can help enrich your retirement or act as a hedge against lean economic times. Having more than one stream of income is in itself a reward.