What’s the Best Way to Earn a Passive Income?
Passive income sounds like a dream: With a bit of up-front work, money flows in forever. Here are the best common sense ways to make that happen.
Passive income sounds like the dream: With a bit of up-front work, money flows in forever.
It’s an illusive, tantalizing idea that seems out of reach.
You might be surprised to learn that while many passive income schemes are too-good-to-be-true, and most legit opportunities require a large amount of liquid investment capital, it’s surprisingly easy to access one of the most passive of passive income streams.
And if you want to get proactive, passive income options abound for those willing to put in blood, sweat and tears.
Common Sense Passive Income for Retirement
Investing should be your first consideration when thinking about passive income. There’s good reason for this. Investing can be an extremely hands-off way to grow your dough.
When most people hear the word ‘investing,’ their eyes glaze over and their ability to attend shuts down. Investing is something the rich do to get richer, right? And with great justification, the vast majority of Americans don’t feel ‘rich.’
But today, one of the best investing options is also one of the lowest-cost and the easiest to manage. As you might have guessed, I’m talking about index funds.
The idea behind index funds is that by purchasing a share in the fund, you’re purchasing a small portion of the entire stock market. The most well-proven index funds follow the S&P 500.
Vanguard is known for its low-fee index fund, but in recent years Fidelity has become competitive.
The only initial problem with index funds has traditionally been the ground floor. Vanguard’s ground-level index fund (VTSAX) requires an initial investment of $3,000. However, Fidelity has removed any minimums to invest in their comparable index fund which follows the S&P 500 (FXAIX.)
Fidelity recently released another index fund with no expense ratios which also comes with zero minimum investment requirement (FZROX,) but this fund is not based off of the S&P 500. Instead, it is based on Fidelity’s own index, which is not as well-studied.
If you are setting aside money in an IRA or another retirement account outside of any employer-sponsored plan you may have, seeking out these index funds can be a low-cost way to invest simply.
Even near the average and median American household incomes, saving 21% of your income from day one on the job could help you reach a comfortable retirement according to the rule of 25 over the course of a 35-year career.
That makes stashing money in your retirement accounts one of the easiest and most accessible ways to build a passive income over the long-term—even if you’re not rich.
Passive Income with Upfront Work
A lot of passive income options also come with a lot of upfront work. This is the murky area where you’ll start to see people argue over whether an income stream is truly ‘passive’ or not.
For example, real estate is a commonly used passive income model for those seeking financial independence. It’s fairly hands-off—especially if you have a property manager.
However, it’s not something you can completely set and forget. You need to make sure your property manager is doing a good job of keeping tenants in the unit, handling tenants’ concerns and taking care of the property. Because real estate involves physical property, you’ll also be likely to spend some time thinking about contractor quotes as you do necessary maintenance over the years.
Another option for investing in physical real estate is a Real Estate Investment Trust (REIT).
REITs are like mutual funds, but instead of investing in a company you’re investing in the person who will take the money, purchase and maintain the property, and grow their physical real estate empire.
They do all the work, and if it goes well, you can reap the dividends.
Alternatively, you could leverage the power of the internet to create an eBook or printable which you create once and sell over and over again.
However, to do this successfully on any type of meaningful scale you’re going to need some more-than-novice level knowledge of Search Engine Optimization (SEO), invest some time into the initial marketing, and maintain your Etsy or Shopify site via fees or even more intensive fixes along the way.
These methods are far more passive than other ways of earning money, but some personal finance nerds will argue with you over whether or not they are “truly” passive.
Truly Passive Income
When we think of truly passive income, where you do the work once and no longer have any maintenance responsibilities, or when you invest in something while someone else does the work and earns you a return, we start thinking about the types of investing that are often limited to the wealthiest. Not necessarily by discriminatory law, but rather by practicality.
If you’re not already maxing out your retirement account(s), you likely don’t really need to look into Forex or options trading right now.
If you can’t sustain the loss of funding a new business that fails, you probably shouldn’t invest in one.
For practical purposes, truly passive income opportunities like these are generally a way for the rich to get richer—which I say with no value judgement—because they contain more risk.
If you have the financial cushion to take that risk, great. But don’t throw all of your money into taxable investment accounts before you’ve already built a good bit of financial wealth.
So what is the best way to earn a passive income?
Ultimately, the best passive income method is going to come down to your individual circumstances. Start by maxing out your retirement accounts, using index funds to simplify the process and reduce costs when possible.
Then, if you have a moderate amount of income left, evaluate your hobbies and give your finances a stress test in a spreadsheet to see if opening your own business—whether it be in real estate or a creative endeavor—is something you could monetize.
Bear in mind that this is the least passive of passive income options.
Finally, if you have enough money, put it to work for you. Educate yourself on riskier investment options which hold the potential for larger returns. Think about the ways in which your investments will impact others less fortunate than yourself.
Or, if you can’t even imagine taking on all that math, pay someone with more experience in this arena whom you trust to do it for you.