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“If you don’t find a way to make money while you sleep, you will work until you die.” Warren Buffett
What is Passive vs Active Income and why should you care?
Passive income is the trophy that everyone wants in order to live a life where working is optional. Want to retire early? Passive income is your token. Want to work only if you want? Passive income.
Every investment that gives you passive income requires some level of activity or commitment at the beginning. They grow slowly, then they pick up steam.
There are two main types of traditional passive income. The one we’ll discuss here, mainly income from financial investments, which requires upfront capital. these include; stocks, bonds, mutual funds, ETFs.
The other type is passive income from royalties. These are the type where you invest your intellectual capital and time, like writing a book, to earn income in the future. A lot of the side hustles, such as, blogging, Youtube channel, creating a course online etc. are essentially royalty driven also.
Active income on the other hand requires activities. Active income is an exchange of your skills and time for a fixed salary and perhaps a bonus. This include your job that pays an hourly wage or monthly wage, working for tips or working on commissions.
Most people spend their life actively working and then retiring. A smaller percentage figures out the passive income game and retire early or semi retire. There is no right or wrong way of earning an honorable living, It’s all about choices. However, it’s good to know about those choices.
How to set up passive income investments
Here we are going to discuss passive income that comes from investments which require an initial outlay of capital. These ideas are worth considering and learning more about them. If you have a job that allows 401K investments, try to max out this option first.
How you approach which investments to make depends on your long terms and short terms goals, how much money you have for investments, how much you want to earn, how much time you have and how much risk you are willing to take.
Related Content: Investing in ETFs
These are 5 Passive Income Investment Ideas
1)Fixed Income Government and Corporate bonds
Interest rates have been declining for a long time, however the prices of bonds go up as the rate moves down (natural relationship). The current yield on a 10-year Treasury bond is 2.569. This is considered a risk-free rate because it’s the Federal government issuing the bonds.
Can rate move much lower, it’s possible, but probably not. However, keep in mind that rates can remain low for a long time.Bonds are a defensive component of a portfolio and they can provide passive income in the form of interest payments. Corporate bonds generally pay higher interest rates than government bonds. However, corporates are more risky.
I have found that the best ways to buy bonds is thru ETFs or Mutual Funds. Vanguard (low cost)and Fidelity both offer bonds products with varying maturity to match your goals.
Vanguard VUSTX, Long Term bonds, Fidelity Total Bond Fund, FTBFX. Long term bonds, Muni Bond Fund, Fixed Income funds can all be bought by the individual investor.
2)Stock Dividends Investments
Investing in companies that pay high dividends is one of the best way to built up passive income streams. The less risky way to do this in by investing in some of the S&P blue chip companies. These companies have been paying a consistent dividend yield over a long time.
The dividend yield is based on the company’s earnings. For example if a company earns $1 per share and pays .50 dividend, that’s a 50% payout ratio. Some companies don’t pay dividend, these reinvest their earnings. The companies that pay dividends tend to be matured companies that have passed their growth stage.
You can buy individual stocks for their dividends yields. For example AT&T have an annual yield of 6.65%, Exxon has one of 4%. If you invest $100,000 in AT&T you’ll get over $6,000 in dividend payments, at 6.65%.
However, you can gain exposure to dividend stocks by buying into an ETF. Some of the popular ETFs are; Vanguard High Dividend Yield, iShares Select High Dividends and SPDR S&P Dividend ETF.
3) Real Estate – Physical
For investors willing to manage their properties, real estate can be a source of semi passive income. Is not totally passive because you have to manage the properties. Real estate can offer both income and property value appreciation. To earn income you must rent the property fully or partially.
The trick with real estate is that in order to have a positive return you need to consider expenses. Expenses includes, mortgage, operating expenses, taxes, insurance and emergency repairs and fixes.
The markets for real estate are also important consideration. If you buy in an expensive area like New York, you may receive very little in profits, but may gain considerable property appreciation over time. On the other hand if you buy in a less expensive area, like Pennsylvania, you may get a better rental income, but less value appreciation over time.
4)Rel Estate – Crowdfunded
I’m a fan of the real estate market because is one of the best investment ever. However, I’m not a fan of managing real estate properties. Some people are great at this, I’m not. Luckily for me and those like me there is the crowdfunded real estate market. Like it’s name, these properties are funded by a crowd of investors.
Another plus of RE crowdsourcing is that you can diversify, Instead of investing in one property located in a certain city, you can take your down payment and divide it up among different properties in different cities.
Related Content: How to invest in Crowdsourcing Real Estate
The historical return on RE crowdsourcing are between 7%-13%. Not bad for residential and commercial real estate. Remember these are just historical. Another option is to invest in a REIT or real estate fund. These funds can generate good rate of returns too, but compare to crowdfunded projects they have less flexibility.
Fundrise and Realtyshares are two of the platform where you can leverage technology to earn passive income from real estate. These two allow you to invest into RE projects with small sums of money.
5)Create your own digital products
You can create your own digital products thanks to the internet and earn passive income in the form of royalties and other revenues. Just like athletes, book writers and song writers, you can collect on royalties. In the past this was very difficult for the average person, however thanks to technology it has become much easier.
You already use the internet for a bunch of things. Why not leverage it to create and make money? If you don’t think you’re creative enough, think again. Sit alone, meditate and start coming up with ideas.
Start with a blog or a course online. i can attest that working your own blog can be very satisfying and profitable. The blog can lead you to other opportunities, such as affiliate marketing, advertising, coaching, teaching, writing a book.
How much you can earn from blogging is up to you, but no two people are the same. There are lifestyle bloggers making $10,000 per month, financial bloggers making $50,000, food bloggers making $5,000 a month, others making zero dollars. Those are some of the bloggers disclosing their revenues. The point is that as a business, blogging has limitless potential.
You can learn how to start your own blog in 8 easy steps with my tutorial.
For a blog you need to put in the time at the beginning, let’s say 2 years. After that, is up to you to grow it more and put more work into it. But, with 2 solid years, I believe many bloggers can make $10,000-$15,000.
Start investing as early as you can and as often
All types of investments are heavily depended on time. The earlier you start, the more money you end up with. For financial investments this is due to compound interest, which literately multiplies your money.
I’m not advocating for everyone to quit their jobs and start living off passive income. Some people love their jobs. But, some time we get tired of working for someone else. We get tired of taking the subways, of dealing with office politics. So, don’t wait until that day and instead start building your passive income portfolio now.
Out of my list of passive income ideas for investments my top two are dividend stocks and real estate, which you don’t always have to own the physical properties. My favorite idea for building passive income based on your skills, it’s a blog. A blog will leave your digital footprint on the inter-webs and make you money, as long as you maintain it and produce useful content.