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When it comes to passive income it generally takes money to make money.
There are ways to make money with no money with a minimal investment of money but those generally take more time to get started.
To get started in making passive income you will either invest your time or your money.
At the end of the day invest in what you are comfortable with.
If you’re going to put your hard earned money to work it should be in something that allows you to sleep at night. Whether that’s your side gig, dividend income, loans, real estate or Cryptocurrency.
Don’t sacrifice your health and well-being for a little extra profit by investing in risky ideas.
Take risks. But only to the point that you are comfortable with.
Rule #1 in investing is Don’t lose money.
Rule #2 is Remember Rule #1.
The broad passive income sources that you will read about are stocks, real estate, blogs and online businesses, savings accounts and CDs, and loans.
When you buy stocks or shares in a company you become a partial owner of that business.
There are a lot of different factors that determine a stock’s value, but in general as a business owner you want the company to do well.
Then over time the stock price goes up, you collect any dividends the company issues (if the company offers a dividend.)
To realize your profit you sell the stock to someone else.
When you see Dow Jones or S&P or NASDAQ this is the exchange where the stock is listed.
A publicly owned company has a few options on what to do with their profits.
One option is to reinvest the money back into the business.
Amazon, for example, does this.
The logic behind it is that they know how to grow the company and are putting the money back in so the business grows faster.
The stock prices of these types of companies are built on the growth of the company. You’ve probably heard the term growth stock.
Another thing a company can do with profits is issue dividends to shareholders.
Why would a company issue a dividend?
Because some shareholders, as partial owners of the company, like to receive an annual amount of money instead of only making profits when they sell.
The business will have an annual meeting to decide how much of a dividend to give that year.
Then, usually quarterly, they will write a check to each shareholder depending on how many shares they own.
Don’t worry, these days it’s direct deposit into your account.
AT&T has paid and annually raises their dividends since 1985.
Their current dividend yield is 6.27%. Their current yearly payout is $2.04.
So, if you own 100 shares of AT&T, every year based on their current dividend you will be paid $204.
I used AT&T as an example because they have issued a dividend for a decent amount of time.
Companies that have issued and increased dividends for 50 years in a row are called Dividend Kings.
Companies that have a record of 25 years in a row are Dividend Aristocrats.
Yes, that means they continued paying shareholders and giving them raises even during the 2008 crash and recession.
Word of warning: Just because a company has been around and paid shareholders a dividend for the past 50 years does not mean they will continue.
Kodak as an example was a stable company that paid a dividend for years.
They went bankrupt.
Your stock isn’t worth much if your company goes bankrupt and stops existing.
It is extremely easy to buy and sell stocks.
It doesn’t get much more passive than signing into your broker, clicking a couple times to buy shares and collecting money every year.
Dividend growth v dividend income
There are a couple different styles of dividend investing.
Some companies are fairly consistent with their dividends and tend to pay a higher percentage.
If you are a more conservative investor or just want the income you can focus on these types of companies.
Generally they are utilities, telecommunication companies, water companies, etc.
They may not be a sexy business but in general they are not going anywhere. (Yes they can go bankrupt too.)
Examples include: AT&T, Verizon, Con Edison, Duke Energy, Dominion Energy, Southern Company.
Another style of dividend investing is Dividend Growth Investing.
These companies might have a lower payout relative to income investing, but they regularly raise their dividends.
If you want some income from dividends but are willing to wait and see your checks grow over the years this style might be for you.
Examples include: Coca-Cola, Texas Instruments, Lowe’s, Chevron, McDonald’s, Johnson & Johnson, Procter & Gamble
In my article on The Best Stocks for Dividends I go over thoughts on setting up your portfolio and getting started.
If you want to learn more about dividend investing try my Bootcamp or take my course.
If you have a 401k through work you are already a little familiar with investing in funds.
A fund is a collection of stocks.
The fund manager buys and sells the stocks in the portfolio.
You buy a stock that tracks how well that portfolio is doing.
There are many options based on risk tolerance, focus on income vs growth, domestic vs international stocks.
There is a theory that a stock’s price accurately reflects it’s worth.
The thought is that all the information available is factored into the price.
The implication of this is that it is impossible to beat the market.
You can go ahead and do research and pick individual stocks.
Or you can just buy the whole market.
If you are going to buy the market the way to make more money is to keep your fees low.
Investor Peter Lynch helped to popularize this idea and created Vanguard.
Through companies like Vanguard you can invest in the whole market with little to no fees.
Apps for investing in individual stocks include some of the big names like E*Trade and online brokerages like Ally bank.
With E*Trade you get the research and customer service that you would expect from a full service brokerage. Trades, when you buy or sell a stock, will cost $7.95 each.
Whenever you put a trade through, whether you’re buying or selling 1 share of a stock or 1000 it will cost $7.95.
If you are buying in smaller amounts you might want to look for a more discount brokerage.
Ally bank is a newer discount brokerage and trades are $4.95 each.
E*Trade and Ally will have their own funds available for low to no cost as well.
If you would like to join a company that specializes in low to no cost index funds head over to Vanguard.
If you want to trade stocks with no fees try Robinhood.
There are a few ways to make real estate a passive income investment.
I’m not counting buying a home and living there and selling when it’s worth more… Although many people think of it as an investment; it would be more of a one time income in this case.
You can also invest in real estate the same way you invest in stocks by buying shares in a REIT.
REIT stands for real estate investment trust.
You are essentially buying shares in a real estate company.
One example is Realty Income, who owns over 5,800 properties and leases their buildings to other companies.
Just like with individual stocks you can head to a company like Vanguard and buy the whole market of REITs.
Landlord with managed property
Becoming a landlord sounds like a lot of work.
If you factor in the cost of hiring a property manager in when you first buy the property you can outsource your duties as a landlord.
You can also budget for a property manager and do the work yourself to keep a little extra profit.
Then turn the business into a passive income generator by hiring someone in the future.
Crowdfunding in real estate has gained in popularity.
Similar to a fund, money is pooled together to buy real estate and the profits are shared.
One popular app is Fundrise.
In order to start, head over and set up your account.
They have different portfolio options:one for newbies, income focused, balanced and long-term growth.
Sign up for the plan that you are comfortable with. If you want more income now so you can invest it elsewhere, go for it. If you want to wait for more potential profits choose the long-term growth. Balanced is somewhere in the middle.
Another popular crowdfunding real estate app is Realtymogul.
They do require you to be an accredited investor, which means you need either an annual income of over $200,000 or need a net worth of over $1 million.
Blogs and online businesses
Blogs and online businesses start as a lot of work.
Take this blog for example.
You work to get pageviews so you can display ads, place affiliate product links to your articles, and promote your original products and courses.
After your site it up pages that you worked on last year can still generate revenue.
It’s not really passive from the standpoint that you will continue to work on your site. It does become passive in the future though because you can earn money from work you did a year ago.
Continuing to earn money from a post or a product you made a year ago is pretty passive. Just like how some actors make money today from TV shows they filmed in the 90s.
Display ads are one passive way for a blog to make money.
As long as you have sufficient traffic companies will pay you to put their ads in front of your audience.
You can get paid for placing outside links in your blog.
If you are an Amazon affiliate for example, if anyone clicks that link and shops like they normally would, I receive a small percentage as commission.
You could even post affiliate links to your facebook, pinterest, or twitter. When people click your links you get paid a commission.
There are many affiliate programs.
Many of the popular apps and brands offer an affiliate program.
It’s good for you because once your link is there you can keep earning money.
It’s good for the business because they are giving a small commission for additional sales.
Creating your own product and selling it through your website is another way to make money.
Again this doesn’t start as passive.
But once your product is set up on your website you can keep earning from it.
You can create PDFs, apps to download, branded items like t-shirts and mugs.
Similar to creating your own product you can create a course.
If you go through Podia or Teachable you can upload your course and it will make money as long as people sign up.
People use the internet to learn pretty much anything.
If I needed to learn a new program for my job I would look up tutorials online.
Use your knowledge and create tutorials and courses to help teach others.
This is the safest option on the list.
Sign up with a CD through your bank.
You give them your money for a period of time and they pay you interest.
The longer you are willing to part with your money the more interest you receive.
You can put your money in multiple CDs and create a CD ladder.
That way instead of having all your money locked up you can always have a part of it available to you.
You can go ahead and do your research and make loans to individuals.
Since this article is more passive focused we will focus on apps that automate some of these processes.
Lending Club is an app similar to Fundrise or Vanguard but for loans. You invest in notes, which is a fraction of a loan instead of funding a whole loan yourself.
They have their own grades on loans, more conservative with lower interest rates and riskier loans with higher potential returns. (Higher risk of the person in debt not paying you back though.)
You can choose how much risk you are comfortable with in your lending portfolio.
There are many ways to earn passive income.
Everything takes money or time and effort to set up.
If you want to take advantage of the time value of money, start working on it today.
I like to diversify between investing in stocks, real estate and loans.
If one part of the economy is lagging I can still see some income from other sources.
Remember, you can only learn so much reading this or any blog or book. The best education comes from taking the first step and putting your info into action.