5 Best Types of Passive Income
Feel free to skip below to the different types of passive income if you don’t want to get smacked in the face by reality in these opening paragraphs.
You Will Burn Out & Desire Retirement Some Day
The day will come when you burn out. Those of you who are under 30 years of age like me are full of drive and ambition to succeed currently. You’re excited to start your new career after college graduation and work your way up the corporate ladder.
But there will be a day when you start burning out. You’ll no longer be as excited to get up and work your 9-5 job as you used to be. You’ll start feeling the desire to sleep in and the desire to stay home to work on other hobbies and activities. You’ll want to be with family, to travel, and to enjoy the freedom of choosing how you spend your day.
Realistically ask yourself if you really want to work 40+ years of your life until you’re in your 60’s and nearing death or nearing a decline in health at least. Don’t get caught up in the societal norm where everyone thinks you have to work until your 60. We will teach you an income trick in a future article if you’re concerned about your retirement accounts and not being able to withdraw from them until age 59 and a half. Don’t let this be a reason to force yourself to keep working until your 59 and a half.
I hope this opening intro isn’t too depressing for you, but instead a smack in the face of the bigger picture and the realities that will hit you some day when your initial energy and ambition dies off.
See the Bigger Picture. Think for Yourself.
To begin seeing the bigger picture you have to look at life and decide what you want out of it. I’m sure there are many readers of this blog who are scared of early retirement because they think they’ll be bored and they enjoy doing the work they do currently.
Early retirement isn’t just sitting on the couch all day doing nothing productive though.
Early retirement is being free to leave your job if it’s no longer an exciting part of your day. Test yourself and see if you are still full of excitement to wake up each day and go into work. Once you start hitting the burn out you’ll know your ready for early retirement.
Early retirement is where you quit your job you no longer enjoy and you go find something meaningful and fulfilling to do with your time instead. This may be volunteer work or a new part time job you love doing and can still earn some money from. In my case, I would love to be free to work from home all day and flip houses part time. This is the lifestyle design I’m after.
If you’re ready to begin thinking early retirement, then let’s dive into the importance of building passive income. Passive income will be your key to quitting the J.O.B. as it will support your living needs that your job income currently supports.
To quit your job, your passive income will need to equal or exceed your current cost of living. Ideally, it needs to exceed it so that you can fund your current cost of living plus have additional income coming in that get’s invested to build your retirement fund and thus allow you to earn more and spend more per year in the future.
What is passive income? It’s income that you create that comes in every month on its own without you having to put in physical work for it. It’s the opposite of your job income where you have to actively trade hours for money. Instead it’s assets working 24/7 for you creating income that you don’t have to work for hence the term “passive.”
The Different Types of Passive Income
Below we will discuss the several different types of assets that will provide you passive income. They are in no specific order from best to worst type. It will be up to you to determine your risk tolerance and lifestyle design that fits best with each type of passive income.
Certificates of Deposit
In the old days, CD’s paid you a high interest rate of 8-14%. A millionaire could still $1,000,000 into a CD in the old days and receive $80,000 to $140,000 in interest.
These are secure investments with a bank or financial institution so there is no risk of losing your money. Today however, CD rates have fallen below 1% and longer term certificate of deposits such as a 5-7 year certificate of deposit is likely paying you under 2% interest. It’s low risk, but also low reward.
This rate will likely rise in the future again so in the mean time you are still in the accumulation phase anyway saving money away at a high rate and investing it in higher return assets to grow. The game plan is too eventually invest $1,000,000 into a certificate of deposit account paying 4% interest when rates climb again, thus providing you $40,000 of income to live off of per year while your $1 million principal doesn’t have any risk of falling in value due to the safety of this asset type.
There are many different types of bonds to choose from. Some are more risky than others but in general bonds are thought of as defensive investments for your portfolio to reduce your investment portfolio’s risk and volatility.
You can find bonds that pay a 2%-4% annual coupon rate and you’ll receive a principal amount when you hold until maturity. You can start by looking into an ETF bond such as IEF (7-10 year treasury) or the MUB (muni bond fund). Today’s millionaires however have shifted more towards investing in real estate and less in bonds.
Real Estate Investments
90% of millionaires contribute their success in building wealth to owning real estate. Real estate is a great way to earn passive income while also increasing the value of your investment over the long term. It also has many tax benefits which the wealthy love to protect their large sums of money from being eaten away by taxes.
Passive income in real estate comes from buying and holding rental property. You will outsource the property management responsibilities to a third party company or professional for a small fee so that you can be completely hands off the management and maintenance that real estate requires.
A lot of people will be turned off by real estate because of having to deal with tenants and property upkeep but you’re smarter than the average person and realize that wealth is all about creating systems and outsourcing work to leverage other people’s time, experience, and skills.
You can expect a 6 to 7% return on investment without using leverage (you pay all cash). For example, if you buy a property for $1 million dollars at a 6% or 7% cap rate, this means the property produces annual net income of $60,000 to $70,000. Again, it’s NET INCOME, meaning all expenses have been paid for including the property manager and this remaining net income is yours to live off of. In the mean time, the value of your investment will increase as inflation occurs and as your property manager raises rents and occupancy rates.
Dividend investing will make up a nice portion of my portfolio along with real estate which is my primary form of passive income. If you have a fear of investing in stocks due to the 2008 financial crisis, hopefully this summary of dividend investing will squash those fears and excite you about the awesomeness of dividend investing.
When you purchase stock of a company, certain companies pay dividends which are quarterly distributions of profits to share holders. As a dividend investor, you are acquiring shares of solid companies that have a track record of paying dividends and a track record of increasing their dividends. You don’t care how the stock price does over time because you’ll receive the annual dividend payments regardless and use this money to live off of. Over the long run though, the stock market has risen an average of 7% annually so you can expect the value of your investment to grow over a long time frame.
An example of dividend investing would be if you purchased $1 million in dividend paying stock over time as you saved up money from your job and other sources of income. The stocks we purchase will be expected to pay out an average dividend of 4% annually. This means you’ll receive $40,000 in dividend distributions each year and it will likely be paid quarterly so every 3 months you’ll be supplied with $10,000 to live on.
If you don’t spend all of the dividend income, you can use it to purchase more shares of stock so you receive more dividends in the future. Also, if the companies you own consistently raise their dividend payment per share of stock, then you’ll receive more dividends each year from the same initial investment and number of shares owned which means your dividend return on investment increases from 4% to a higher percentage rate.
Build Your Own Products/Assets
What if you built a business that could be automated and pay you monthly passive income? I did this believe it or not and I’m going to share with you how you can do it also.
I started creating eBooks my freshman year in college and by graduation I had over 10 books published on Amazon Kindle Publishing as well as my personal websites. Topics ranged from golf tips to stock market investing to real estate investing. These eBooks can provide you with an extra $500 to $1,500 per month to live on without much energy on your part.
Once I built these eBooks and put them up for sale, the work was done. Every month I received automatic deposits to my bank account from Amazon for the sales that occurred that month as well as deposits from PayPal for sales on my websites.
As mentioned, I also built websites that produced passive income in other forms besides eBooks. A website can be used to sell your own products, sell products for someone else, and to display ads/sponsorship’s. I took advantage of the first two by creating my own eBooks and training courses as well as promoting other people’s products through affiliate marketing.
The key is to be consistent. Once you’ve published lots of blog articles over 1-3 years and networked with other bloggers, guest posting on their website, your website will get a lot of traffic each month which will lead to sales.
You must set up a system to funnel leads and traffic to your products and convert these leads into sales. Once you have your system set up, you sit back and let the monthly passive income happen.
You can start a website for as little as $3.95/month with Bluehost who I recommend and use myself. I created this tutorial series on how to set up a website in under 15 minutes with no prior website experience needed.
The goal is to set up your website, eBooks, and eProducts and let it go to work making you money (hopefully an extra $2,000 to $5,000 per month). Google will index your articles and over time your posts will start ranking on the top pages of Google for specific keywords people type into the Google search box. This is how you’ll get organic traffic.
How much could you potentially make?
Realistically, $500 to $2,500 per month within a short amount of time. If you stay consistent for 3-7 years building content and putting it out there on the web and getting traffic to your website, then you could potentially make multiple 6 figures. Pat Flynn of SmartPassiveIncome.com just made over $170,000 last month at the time of writing this article. It was maybe a year ago when I first found him and his website was making him $40,000 to $50,000 per month so you can see how much his income has grown in just a year. He publishes monthly income reports breaking down how he is making his income online.
I publish monthly reports as well so you can see proof that it’s possible to earn passive income online and see my income growth over time.
The internet is powerful and the method of the future. It wasn’t long ago that we had dial up internet so don’t think you’re too late to the party. The internet will continue to grow and more and more people will build large amounts of income from their websites and online products. The key is to be consistent and to find a topic you’re passionate about so you can be excited about your work and helping others.
Start building your passive income today. Need further validation? Check out my monthly income reports to see how my passive income has grown each month.
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