How to Generate Passive Income to Reach Your Financial Goals
Making money while you are sleeping or do something else sounds like the ultimate dream. When you are setting financial goals, you may come across the idea of passive income. Some passive income ideas you come across aren’t all that passive at all. You may not want to pick up a second job when you are already busy with everyday life.
Some passive income ideas do require that you put in a lot of work, which seems to negate the idea of passive income. In order to generate passive income, you will likely need to invest in an asset but you don’t necessarily need a lot of cash. Passive income can be a great way to meet some long term financial goals.
What Is Passive Income?
Receiving passive income means getting regular earnings from a source that is not a contractor or employer. The IRS says that passive income comes from two different sources: either a business where you don’t actively participate, such as stock dividends or book royalties, or rental property. Some people think of passive income as getting something for nothing as a get rich quick appeal.
However, it does still involve a lot of work. Usually, you are doing the work upfront. Most of the work is done upfront but it may also involve some additional labor along the way. For example, you may have to keep your rental property maintained in order for it to keep generating passive income.
How to Generate Passive Income
There are a number of ways to generate passive income that you can use, depending on your financial goals and your talents and skills in order to actually complete some of the things.
1. Sell an Information Product
A strategy for how to generate passive income is to establish an information product, such as a video or audio course or e-book. Then you are able to kick back and watch the cash flow in as your product sells. For example, if you create a course then you can distribute and sell it through a site such as Skillshare or Udemy. These are a great source of passive income because you make money after that first stretch of time.
Put Time and Effort Into It
However, it does take a lot of time to create the product. If you want to make good money for it, it needs to be a great product and there isn’t a lot of space for a subpar product if you want to keep making money. You need to build a strong product, market it, and even plan for more products if you want to be successful and keep generating income. One product isn’t likely going to be enough since the best way to sell an existing product is to create even more excellent products. It becomes even easier to generate a good income stream once you master the business model.
2. Rental Income from Real Estate
Rental income can be a great way to generate passive income but it may require more work than you expect. When learning how to generate passive income, real estate and rental income are usually top on the list. In order to generate passive income using rental properties, you need to take the time to learn how to make it profitable or else you could lose your investment. In order to get passive income from a rental property, you must determine how much return you want on the investment, the total cost and ongoing expenses, and the risk of owning the property.
For example, if you want to earn $10,000 a year using the property and it has a mortgage of $2,000, along with $300 for expenses and taxes monthly, then you are going to need to charge $3,133 to reach the goal. This means the property needs to be in an area where it makes sense to charge that amount. Consider the other risks, such as what happens if you aren’t able to rent out the property or if there is a tenant who damages the property. If you have a mortgage on your rental property then once your loan is paid off your cash flow will increase dramatically and your mediocre investment can be allowed to skyrocket.
3. Affiliate Marketing
With this type of marketing, a website owner, influencer, or blogger promotes a third-party product and includes a link to the product on either their social media account or personal website.
Amazon is one of the most well-known affiliate partners but ShareASale and eBay are also some big names. It’s considered passive income because you can earn money just by adding a link to your social media or website. You won’t actually earn anything if you aren’t attracting readers to your site to click on the link and buy the product. If you are just starting out and don’t have any sort of online audience then it’s going to take time in order to create relevant content and build traffic.
4. Invest Using a High-Yield CD
You can invest in a high-yield certificate of deposit at an online bank and it allows you to generate some passive income without a lot of work. In order to make the most of this investment, you need to do some research ahead of time on the best CD rebates.
It also may be more beneficial to go with an online bank rather than your local bank since you can get better rates. If your bank is backed by the FDIC, there isn’t a lot of risk and your principal is safe. Over time, the biggest risk comes with rising inflation.
5. Peer-to-Peer Lending
A peer-to-peer loan is a personal loan between the borrower and user and is made through a third-party intermediary, such as LendingClub. As a lender, you are getting income from interest payments made on the loans. However, the loan is unsecured so you can face the risk of default.
In order to help with this risk, you should diversify the lending profile and invest in smaller amounts over multiple loans and look at the historical data of the prospective borrower in order to make an informed decision.
It will take some time to learn more about P2P lending so it’s not exactly passive. When you invest in multiple loans, you need to pay close attention to the payments you receive. You should reinvest what you make in interest if you want to build some more income. An economic recession can make some loans more likely to default.
6. Dividend Stocks
If you are a shareholder in a company that has dividend-yielding stocks then you will get payments at regular intervals from that company. Companies will pay out cash dividends usually on a quarterly basis out of profits if you own the stock. Dividends are paid for each share of stock. The more you own the larger your payout. It’s one of the more passive forms of making money since stocks aren’t related to any specific activity other than your initial investment.
Smart Investing
However, you do need to choose the right stock. If you are a beginner then it can be easy to jump into the market without actually investigating the companies. You need to be comfortable with a company’s financial statements. There are ways to invest in these types of stock without spending a lot of time evaluating companies if you use exchange traded funds. These are easy to understand, are inexpensive, and have a better potential return compared to mutual funds. Economic stress can cause some companies to cut dividends and there are some risks involved.
Savings Accounts
It won’t get more passive than putting money into savings accounts at an online bank. Technically, all you have to do is watch the interest add up. Online rates will usually be up to 10 times higher than what your local bank will offer so be sure to shop around. Below you can take a look at some of the best savings account options out there:
Investing in an account insured by the FDIC means little risk. The biggest risk you face is that interest rate will fall when the economy starts to weaken and then you will have lower payouts that might not do much to beat inflation, causing you to lose purchasing power.
REITs
REITs are real estate investment funds. This is a company that owns and manages real estate. There is a special legal structure so these companies don’t pay or pay little corporate income tax and pass along most of the income on to shareholders. You are able to purchase REITs on the stock market like any other dividend stock. You will earn the money the REIT pays out and the best ones have a record of increasing your money on a yearly basis.
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Just like dividend stocks, an REIT can be riskier and you have to learn how to pick the good ones. You may need to analyze each of the businesses that you might buy and this can be a time-consuming process. It is passive but you can also lose a lot of money if you aren’t sure what you are doing. This form of passive income is not protected during a tough economic time. If your REIT doesn’t make enough income, it could cut the dividend or get rid of it. This means your passive income takes a hit when you may need it and want it the most.
Use a Bond Ladder
When you create a bond ladder, you are creating a series of bonds that are going to mature over a period of years at different times. The staggered approach allows you to decrease your reinvestment risk. This is the risk of tying up money when bonds are offering too low of interest payments.
This strategy has appealed to many near-retirees and retirees over the years. You can collect interest payments and then, when your bond matures, you expand the ladder and roll that principal into a new set of bonds.
You may start with bonds of one year, three years, or more, depending on your strategy. The first year when the bond matures then you still have remaining bonds for two years, four years, and six years. You are able to then use the proceeds from the recently matured bond to buy another one. While you are able to lower one major risk of buying bonds, know that bonds do come with other risks. The federal government will back treasury bonds but corporate bonds aren’t backed so if you invest in corporate bonds then you could lose your principal. You want to own many different kinds of bonds to diversify the risk and eliminate any single bond hurting your portfolio.
Renting Out a Room in Your Home
This doesn’t require a lot of strategy but only works if you have the space. If you have the space and aren’t using it then you can make money off of it. You are able to list your space on different websites, such as Airbnb, and set the rental terms yourself. You get a check without a lot of extra work, especially if you end up getting a longer-term tenant.
Letting a stranger stay in your home comes with its own risk about stealing valuables or destroying the property but there isn’t a lot of financial risk.
Advertise on Your Car
You might be able to get extra money just by driving your car around town. There are specialized advertising agencies that will evaluate driving habits, including how many miles you drive and where you drive. If you are a match then the agencies wrap your car with the ads and this won’t cost anything for you. Many agencies are looking for newer cars and you will need to have a clean driving record. If you are already putting the mileage on your car then there are really no extra costs associated with this. You want to make sure that you find a legitimate partner to work with. There can be a lot of fraudsters in this space.
YouTube Ads
This strategy only works if you already have a YouTube channel or you are going to want to invest the time into cultivating a YouTube channel. Note that this venture is rapidly growing so it’s not a bad way to spend your time. You can create videos in just about any area that you like, whether it’s movie reviews, opinions, tutorials, or music. Then use Google AdSense with the video, which overlays your videos with automatic ads. When a viewer clicks on your ads then you get the money from AdSense. The key is that you have to create compelling videos and have some marketing sense to promote the videos on social media. There is a lot of work that goes into creating a video but once the video is done, it can be a passive cash flow for years to come as long as the topic is relevant.
Put Your Photos to Work
If you like photography and have a knack for it then you may be able to convert this into a passive income source. Websites, such as iStockphoto or Shutterstock, give you a platform to sell your photos. Depending on which platform you choose, you either gets a flat fee or a percentage of each photo that is sold. A single photo then could represent a cash flow source since it could be sold multiple times. You just need to create your portfolio and then the activity becomes passive. The technicalities of photo sales are handled through the web platform so you don’t have to worry about that.
Utilize Cash Back Rewards on Credit Cards
There are many different credit card options that give you cash back rewards that can range from 1% to 5% of the amount purchased. If you are going to be shopping anyway and buying these items then it makes sense to take advantage. Rewards give you an opportunity to get some passive income from doing what you would be doing anyway. However, be mindful that if you aren’t already going to be buying this stuff, it can be easy to get into credit card debt and the rewards won’t make up for the interest you are spending.
How Many Passive Streams of Income Should You Have?
There isn’t a clear cut answer when it comes to how many income streams you should have when learning how to generate passive income. It will depend on where you are financially and what your goals are for the future. It’s usually best to have a few to start. Diversifying your income stream can help you reach these goals much faster.
Finally,
When learning how to generate passive income, know that it does take some initial work to set things up and may also require some creativity. If you are someone that is already super busy then it may even take some more time since you have to learn what it is that you are good at that can make you some extra money.
Know that there are plenty of different ways to generate passive income so you will likely find something you like. Start to do your homewor