There are many ways to make money. Starting a side hustle, turning a hobby into a profession, selling collectibles or valuables, etc., can all help you earn supplementary income apart from your job. However, this can still present some hassles. Firstly, finding something to sell can be challenging. Moreover, selling may be a one-time thing. You may find an old coin that could fetch you a great value today. But you are unlikely to find such an item every now and then. Having a side hustle can help you earn. However, it would require you to work. Running a business along with your job can be time-consuming and require a lot of effort.
Passive income ideas can help you tackle these issues and offer you a regular source of supplementary income. Passive income can be a great way to build your savings corpus without wasting your time or energy. There are three types of incomes – active income, passive income, and income from your portfolio. Active income is the income you earn from a job or a business. Your salary or the profits from a business you run would be clubbed under active income. Portfolio income refers to the money you earn from your investments. For instance, your capital gains made from investments in stocks would be known as your portfolio income. This can fluctuate from time to time, depending on the market situation. However, portfolio income can significantly contribute to capital appreciation and help you fulfill your different financial goals.
Passive income, the third type of income, can help you create wealth in a passive manner. It can be of particularly great benefit in a low-interest rate environment. If you wish to know the feasibility of passive income ideas that you may have, reach out to a professional financial advisor who can advise you on the same.
Let’s find out more about how to generate passive income and the best passive income investments you can consider at this time.
What is passive income?
Just as the name suggests, passive income is an income that lets you earn income passively. You do not actively work towards earning this income. Instead, your money comes from sources like a rented property, a limited business partnership, a business where you invest as a silent investor, and other similar options. The only effort involved in earning passive income lies in the process of finding a suitable asset that can help you create money. Once you have found a passive income source, you do not have to do anything actively to create wealth. The funds flow in automatically.
Why is it essential to have a source of passive income?
Both portfolio and passive incomes are important as they act as an additional financial cushion in your financial plan. If you happen to lose your active income source, you can safely rely on your other incomes to stay afloat. For instance, many people lost their jobs during the pandemic and had to rely on their emergency funds to stay afloat. Others redeemed their investments. Having a source of passive income ensures that you always have financial backing.
Further, passive income can be more important than portfolio income in some cases. Many of your portfolio investments like a 401(k) or an Individual Retirement Account (IRA) can only be redeemed after the age of 59.5. If you make withdrawals before the maturity date, you have to pay a 10% penalty. Other assets, such as an annuity insurance plan, can also only be accessed after retirement. This creates a liquidity problem in your pre-retirement years.
On the other hand, passive income can offer you a regular source of money that can sustain you during emergencies and act as an extra income generator at other times. The money you earn from your passive income ideas can also be invested in the market to generate more funds.
How to make passive income
Here are some ways to make passive income:
1. Invest in dividend-paying stocks:
A dividend is an income that you receive from investing in the stocks of a company. Some companies pay a regular dividend to certain shareholders from their earnings. This dividend payment can be a source of passive income for you. However, it is essential to note that not all stocks pay dividends. Only companies that have been consistently performing well are in a position to pay their shareholders. New companies usually prefer reinvesting their profits back into the company for further expansion and growth, over paying their shareholders. Moreover, the value of the dividend can differ for each company. It can also vary for the same company across years.
Companies in the dividend aristocrat label can be the best stocks to buy right now. These include companies in the S&P 500 index that have paid a dividend to their shareholders consistently for the last 25 years or more and have also increased their value annually over the years. Dividend aristocrat companies have a market capitalization of $3 billion or more, which means they are stable businesses with little scope of fluctuations or a downturn.
Investing in a dividend-paying stock can offer you two advantages. Firstly, you earn money from the dividend. Secondly, you make money from the appreciation in the share prices.
2. Buy physical real estate:
Real estate can be one of the best passive income investments. You get ownership of a high-value asset that can be rented, sold, leased, or passed down as a generational investment. The long-term returns of real estate have been pretty high. Moreover, you can acquire a real estate property easily with convenient property loans.
If you own a residential real estate property, you can consider renting it out for some stable rental earning in return. This can act as a secondary income source for you. Commercial real estate can garner even higher returns. However, the cost of investment would also be substantially more in this case. Further, real estate can be sold if you ever need lump sum money to cater to a financial emergency. You also have the option to use it as collateral for a loan. Further, real estate can secure generations to come as it can be passed on to your children and grandchildren.
However, you may have to tend to maintenance costs, damages due to wear and tear, and above all, have a lot of savings to buy a piece of land in the first place. This can require years of saving and investing in the right instruments. Although some options like Real Estate Investment Trusts (REITs) pay 90% of their income as dividends to investors, this may not be the same as owning physical property. Moreover, the dividends earned from REITs are taxable as ordinary income. However, they still make for a good passive income source.
Another way to invest in real estate is by crowdfunding. This can offer you ownership, but you would have to split it with a number of other investors who may have distinct concerns and views about how to manage the property. But it also cuts down costs, making it easier for you to invest.
3. Consider peer-to-peer lending:
Peer-to-peer lending is like a loan. However, instead of taking a loan from a bank, you take a loan from another individual. You can do so on a peer-to-peer lending website. These websites connect borrowers to lenders directly while charging a commission in between. As an investor, you can invest your money in a business by being a lender. Moreover, since this is a form of passive investing, your involvement is limited to lending the funds. You stay a silent investor in the business and have no work in the management of the company. Peer-to-peer lending is also being leveraged by individuals to consolidate other kinds of debt like student loans, auto loans, etc. The return can range from 7% to 12%. However, there is no limit on the loan value. Depending on the website, you can lend as little as $25 or $25,000 and more.
4. Invest in a certificate of deposit (CD) or a money market account:
CDs or money market accounts can be two of the best fixed-income investments if you are looking for low-risk options as your principal investment value is secured. They can be opened at the bank. While a CD is a time deposit, a money market account is a mutual fund that invests in short-term securities like overnight commercial papers. There are no income limits or thresholds for minimum or maximum investments in either of these options. Moreover, CDs and money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to a maximum of $250,000 for individual accounts and $500,000 for joint accounts.
It is important to understand that while CDs and money market accounts contain no market-linked risk, they offer considerably low returns compared to other passive income options. They may be ideal for you if you are nearing retirement and do not want to add any risk to your investment portfolio. However, they cannot be used for capital appreciation.
5. Earn from royalty payments:
Royalty refers to the money you can earn from a piece of art that you make. For instance, if you write a book, every time a book is sold, you will earn a royalty from it. A royalty can be acquired from any copyrighted work, franchise, or patent like a TV show or movie. Landowners can also receive a royalty for natural resources such as oil and gas or mining. Royalty payments can be a long-term source of income. They are stable and can benefit you and your future generations for decades. If you have ownership of an asset that can help you generate royalty payments, you can consider using it as a passive income source.
6. Invest in index funds:
An index fund is a type of mutual fund or exchange-traded fund that tracks a particular index, such as the S&P 500. Index funds mimic the performance of the benchmark index and do not outperform it. They are passively managed and have a low management cost. Since index funds have no human intervention and their underlying securities do not change unless there is a change in the index itself, they can be ideal for passive investing. They carry low risk and can be used as a buy and hold asset.
These are some of the best passive income investments. However, you can consider many others depending on what you are looking for. For instance, physical real estate may not suit everyone’s investment budget. Even with low down payments and loan options, buying real estate can be tricky. Moreover, the risk involved is high. However, REITs can be a feasible option for most investors. Likewise, CDs and money market accounts carry almost no risk and have very low investment values, making them ideal for all investment budgets.
If you want to create a passive income source for yourself and secure your future financially, you can get in touch with a professional financial advisor and pick a suitable option from the numerous ways to make passive income. Use Paladin Registry’s free advisor match tool and get matched with 1-3 qualified advisors who may be able to help you with your unique financial goals and requirements.
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