Passive income can enable you to live the dream of making money while you sleep. Establishing a passive income invariably requires an investment of time or money, but once set up it can produce income that is no longer tied to the hours you work.
Developing multiple sources of income will not only help you to build your wealth, it also provides greater financial security. If you were to lose your primary source of income, your other income streams can help to support you.
When you start to look for additional income streams you will soon find that they are all around you. To help you get started, here are some of the most reliable ways to start producing passive income.
High-yield Savings Account
With interest rates at historic lows finding a savings account that yields a reasonable return can be challenging. Take away fees and inflation and you may find that your savings account is actually producing a negative return. the answer? A high yield savings account.
To find a high-interest savings account you will probably need to go beyond the brick and mortar bank you usually do business with. The best high-yield savings accounts are typically found online. Online banks don’t have the same overheads costs of banks with physical locations.
Credit unions often offer some of the best rates for high-yield savings accounts. Before you decide to open an account with a credit union make sure that you are eligible. You will need to first join the institution before you can be accepted. There may also be a cost to join which you need to take into account.
Three of the best high-yield savings account currently on offer include:
- SmartPig by Sallie Mae
- Customers Bank High-Yield Savings Account
- Affirm Savings
Invest in Long-Term Stocks
Long-term investment stocks can deliver great returns. The average annual return on the S&P 500 index between 1957 and 2018 is 7.96%. Over the past decade returns have been even greater. The ten year period ending on June 30th, 2019 saw the S&P 500 return an average return of 14.70%.
The long term return on stocks is relatively predictable. But over the shorter term returns can be far more volatile. The recent financial crash of 2007 through to 2009 saw very large short term losses. This is why stocks aren’t a good place to invest if you will need access to those funds in the near term.
In recent years ETF (Exchange Traded Funds) have become a popular way to invest in stocks. An ETF seeks to mimic, but not out-perform, the returns of a particular index. These ETFs tend to have very low fees. Because research has shown that the vast majority of fund managers are unable to outperform the market, using a low-cost ETF can make a lot of sense.
Buy an Investment Property
Building wealth through real estate is one of the most common routes to riches. Since 1940 the average median value of a home in the United States has increased by 5.5% per year. Buying an investment property brings with it many advantages. Investment properties can produce a relatively predictable cash flow. There are significant tax advantages if you buy real estate. And having an investment property allows you to diversify your portfolio.
One of the biggest benefits that buying an investment property has over asset classes is leverage. When buying an investment property you can borrow the majority of the purchase price. This allows you to control and benefit from a larger financial asset, than you would using your capital alone.
As an example, if you had $50,000 to invest in the stock market, and it produced a 10% return you would have made $5,000 on your initial investment. Instead you could use that $50,000 as a 25% deposit to purchase a $200,000 property. If that investment property increased by 10%, it would be a $20,000 return. While this is a highly simplified example and doesn’t take into account the cost of borrowing, it does show the power of leverage.
Cash flow from investment property makes it particularly attractive for passive income. The cash flow from real estate tends to improve over time, as you reduce your mortgage and equity builds. Websites like Zillow make it much easier to identify the best places to buy investment property and invest in opportunities beyond your local city or state.
Advertise on Your Car
Want to earn passive income just by driving your car? Advertising on your car will let you do just that. Companies will pay car owners to cover their vehicle with adverts. These colour adverts are known as car wraps. The branding is printed on a vinyl covering which can be removed without damaging the car.
While you can approach companies directly, there are a number of different car advertising services which act as intermediaries. Because it is your vehicle you will be given the option which company you brand your vehicle with. You can also decide if you want the full car covered or to feature a smaller advertisement. In general the bigger the advert, the larger the payment you will receive.
Rent a Room in Your House
Renting a room in your house is a flexible way of generating a passive income. Using a platform like AirBnB you can select when you want to make your room available. If you live in a popular location for travellers, the day rate can be surprisingly profitable.
You may prefer to rent your room on a more long term basis. Before renting out your room determine the monthly rent and what bills will be included. If the tenant hasn’t rented from your before make sure to get a written reference. Decide with your tenant how long they can rent the room for and how much notice they need to provide. It is also a good idea to outline written ground rules, as you will be sharing a common space.
Enroll in Your Employer’s Retirement Program
Enrolling in your employer’s retirement program is one of the smartest ways for the average person to build wealth. The contributions that you make through your employer’s retirement savings account are tax deferred. Being tax deferred means that your taxable income will be reduced by the amount that you have contributed to the program. While you will eventually be taxed on the amount when you withdraw it, that will occur when you are in retirement, and consequently should be in a lower tax bracket.
The returns that your investments in your retirement program produce are also tax deferred. Again this means that you do not need to pay tax on them until they are withdrawn during retirement. Through careful retirement planning you can choose the best time to make this withdrawal.
In addition to this many employers will offer matching contribution provisions. You should aim to contribute the maximum that your employer will match. Failing to do so means that you are in essence missing out on free money.
Reduce Your Debt
Looking for some of the highest yielding and safest investment you can make? Pay off your personal debt as quickly as possible. According to a 2019 study by Experian total consumer debt in the United States is $14.1 trillion. The average American carry’s debt of $90,460.
Personal debt often has very high interest rates attached. The average APR for credit cards in the US was 16% in 2020. Compare this with the less than 1% that most savings accounts now offer. Using spare cash to eliminate credit card debt will therefore produce a much greater return. Using a debt management program can help you to consolidate your loans and accelerate paying them back.
For most people their biggest debt will be the mortgage on their home. With interest rates at historic lows, it makes sense to look at your refinance mortgage options. Reducing your interest rate can save you thousands of dollars in payments over the course of your loan.
Developing passive income is the smart way to build wealth, develop security and create greater financial freedom. Passive income may start with small trickles, but eventually they build to reliable money streams.