One of the best goals in life is having multiple sources of passive income that can pay all of your bills and fully support your lifestyle without you having to work.
While most of us dream of such a situation, it is never too late to start generating passive income, no matter how modest you may start out. Even if you can only scrounge together a hundred bucks a month, it is still in your best interest to let your money work for you.
What is passive income?
Quite simply, passive income is income that you come by passively. In order to understand passive income, you probably first need to understand active income.
Active income is income that you must work to receive. This involves most people’s jobs where they devote their time and resources in exchange for a paycheck. This is considered active income because you must put in effort in order to get your money.
The beauty of passive income is that you don’t need to lift a finger in order to get it. In fact, you could be generating income while you sleep, take a shower, watch a movie, drink a cup of coffee, play with your kids, take a vacation, etc. You don’t need to actively work in order to receive passive income.
Passive income gives you back the most precious resource known to man… your time.
Now that I’ve gotten you interested in passive income, let’s learn how to achieve it. Here’s a list of great passive income ideas that you can start in 2018:
Invest in index funds
One of the easiest and best ways to start generating passive income is through investing your savings in the stock market.
Rather than buying stocks in single companies like Apple or Amazon, I would advise people to look into exchange-traded funds or ETFs. ETFs come in a variety of flavors, but index fund ETFs are some of the safest ways to invest your cash because rather than betting on any one company versus another, you can find safety in the average.
Dare to be average
One of the best things about an index fund is that it dares to be average. You may not see the highest returns year after year, but you also won’t see the lowest. Index funds are a safe bet that most financial advisors would recommend, and the majority of even robo-advisors utilize index funds to comprise their portfolios.
Here are my favorite index funds:
- VOO. This is Vanguard’s Standard and Poor’s 500 (S&P 500) index fund. The S&P 500 tracks the top 500 largest U.S. stock companies and is a great average index fund for any portfolio. VOO also comes with a fantastic low fee of 0.04%!
- VTI. This Vanguard index fund tracks the entire stock market, including foreign stocks. Like VOO, it’s a great average index fund with a super low fee of 0.04%.
- VGT. This index fund is Vanguard’s information technology ETF. It’s a little riskier than the other two index funds because it focuses on a specific sector of the market (information technology), but it has had spectacular gains ever since its inception in 2004. Although the risk and the managing fees are higher (0.1%), VGT has returned over 100% more than VTI since 2004.
Here’s why you should love index funds:
- Stable returns. Good index funds are less volatile than single company stocks, and if one company has a horrible year, it is often neutralized by other companies having an amazing year.
- Compound interest effects. Companies tend to grow exponentially, and so do their stocks. If you re-invest your dividends you can increase your compounding interest effect. Imagine you started with $1,000 in a stock that grows annually at 10%. In the first year, you would profit $100, but the second year, you will profit $110, then $121 the third year, and so on. Each year you will get more returns because of compounding interest.
- Low fees. The best index funds are super cheap to own, and VOO and VTI only cost 0.04% annually, which is $4 per every $1000 you invest.
Things to remember when investing in the stock market:
- Don’t be emotional. Emotional trading leads to stupid decisions. Be able to survive a downtick in the market without pulling your hair out and taking your money out for a fraction of its actually worth.
- It’s time in the market, not timing the market. Don’t try to time the market. Even the best investors cannot do this, and unless you’re insider trading, neither can you. The best thing you can do is to have more time in the market, as historically it only goes up in the long term.
Invest in real estate
Own a home
There are a few ways to go about investing in real estate. The most common is simply buying and owning a house. This is great because by paying your mortgage, you are getting back ownership in your house.
Compare this with renting where you are paying off someone else’s mortgage and you will never see your money back.
Housing prices historically rise over time, so baring any financial crashes or housing market bubbles, you are likely to make a profit long term by owning a home.
Owning a home is also a particularly useful type of passive income because you actually get to live in your house while you own it. Compare this with stocks which are just out there making money, but not serving additional purposes.
Own a rental
Another way to make money in real estate is to rent out a house that you own to someone else. Let your renters pay off your mortgage and then some, and once the house is completely paid off, your rental will be a huge source of passive income for you.
Realize that renting out your home is probably going to be a partially active income strategy unless you employ a property manager to do that for you (which will eat into your returns). It will require maintenance costs, vacancy losses, potential lawsuits from property damage, and is generally not for the faint of heart.
I suggest you check out this awesome rental calculator to see if renting is a good idea for you.
Sell creative content
A great way to get passive income is to sell content that you have previously created, preferably something that you create once and then can resell limitless times.
Write and sell books
With books, you will have to spend some initial time upfront to create a quality product. But, afterward, you can sit back and collect on your hard work, and this is when the passive income can take over. You can publish and sell books for free through Amazon Kindle Publishing!
Start a website
Another great potential source of passive income can be achieved through owning a website. Popular blogs can get hundreds of thousands of page views every month, sometimes even millions if they really know what they’re doing. Add in some advertisements and you’re looking at a great source of passive income cash.
Create an app
Now you might be thinking, “Jeez Dave, I can barely make myself a sandwich, let alone code a freaking app!” But that’s okay, because, on the internet, you couldn’t throw a stone without hitting 3 lawyers and 5 app developers right in the face. You’ve got options.
There are companies out there that will take great ideas and offer you royalties if they decide to develop your app idea. If you are convinced that your app idea is super incredible and you want more control over it, consider developing it on your own and hire a freelancer or a company to build it for you.
Ideally, sell digital art that you can sell over and over again. This way it’ll be considered passive income instead of you actively creating something new for each sale. A great example is to sell stock photography or stock music that you’ve created. Create it once, then sit back and collect your royalties.
Do literally anything to grow your money
Even if you aren’t fond of any of these ideas, at least do SOMETHING with your money rather than leaving it in your checking account.
Locked away, your money is as good as rotting… literally.
Think about this, inflation is a neverending demon… it just keeps rising! If you don’t do something to grow your money to at least match inflation, then your money is going to decrease in value over time.
Get a savings account
Even with the pitiful returns of a savings account of maybe 1-2% per year, you will at least match inflation with your money and maintain its value. This is a safe way to keep your money, but don’t expect to retire with its returns.
Not ready for passive income yet?
There may be some reasons for why you just aren’t ready to start making passive income yet. Maybe you are unemployed and you don’t have a significant enough savings account built up. Fair enough.
If you are looking for ways to get out of debt and start saving money without actually making more money, then check out this article: