When it comes to personal finance, passive income is the holy grail. And, for a good reason. A passive income gives you more time on your hands and less financial stress. Also, as we’ve hopefully learned from the COVID-19 pandemic, having multiple income streams can make all the difference in the world.
1. Annuities“As a refresher, annuities are contracts that you purchase from an insurance or annuity company with either a lump-sum payment or installments,” explains Deanna Ritchie. “Eventually, your money will earn interest, and you’ll start receiving monthly payments. You should consider purchasing an annuity if you’re planning to live a long and healthy life.”
Before making such a commitment, you need to do your homework. In this case, comparing the different types of annuities to see which works best for you. “In the right situation, annuities can provide an excellent source of incremental income without having to earn any additional labor,” adds Deanna.
“When it comes to creating passive income in retirement, annuities are one of the most reliable and effective strategies," she says. The reason is that after it’s been purchased, there’s “no need to participate actively once you have purchased your annuity contract. Instead, just sit back and wait until the annuitization period begins.”
Furthermore, “annuities generate higher income than other passive income streams like stocks, bonds, CDs, and mutual funds.” But that’s not the only advantage. Other perks “include tax-deferred arrangements, premium protection, and contract provisions that allow” for customization.
2. Dividend StocksIs there any better way to earn passive income than dividend stocks? Of course, you need to do a lot of research and invest a significant amount of money if you want this to be a worthwhile investment. But, if you put in the time and more, along with regularly investing money into dividend stocks, you will amass a solid residual income.
3. A Bond LadderWhat’s a bond ladder, you ask? It’s merely a portfolio containing a series of individual bonds that mature on different dates. As such, this will diversify an investor’s bond holdings.
4. Index FundsIndex funds are mutual funds or exchange-traded funds that are connected to a particular market index, such as the S&P 500. As such, the performance of these funds are based on the performance of the underlying index they track. And, they’re also passively managed.
5. High Yield Savings AccountWith a high-yield certificate of deposit (CD) or savings account via an online bank, you’ll generate a passive income. Even better? You’ll also earn one of the highest rates in the nation. And, you can achieve this without having to leave the comfort of your home.
If you want to get the most out of your CD, thoroughly search for the nation’s best CD rates or top savings accounts. In most cases, an online bank offers more favorable interest interests than local banks. And, to reduce risk, make sure that the financial institution is backed by the FDIC as you’ll be guaranteed a return of principal up to $250,000.
6. Rental Property Real EstateYou can also bring in a monthly income with a cash-flowing rental property. Moreover, a management company can take over the running of these properties so that this becomes truly passive.
- Roofstock allows you to purchase cash-flow positive single-family home rentals.
- Fundrise is a real estate crowdfunding platform where beginners can invest in private real estate.
- RealtyMogul lets you become a limited partner in a large development, such as multi-family or commercial properties.
- EquityMultiple allows you to invest in real estate with as little as $10,000.
- Groundfloor is a crowdsourced real estate investing and lending platform that aims to make private capital markets open to all for as little as $10.
- FarmTogether allows you to invest in farmland for a more steady and consistent investment option.
7. REITs“Real estate investment trusts, or REITs, work by pooling investors to generate funds that can be used to purchase or fund income-generating properties,” clarifies Rumzz Bajwa. “REITs are companies that own several real estate properties like commercial buildings, apartment complexes, or hotel buildings.” When you purchase stock from these companies, you’re able to “enter the real estate investment market without actually owning the property.”
Why are REITs so appealing? First, because “you don’t own the properties you invest in, you are free from the responsibilities of maintaining them,” states Bajwa. And secondly, “REITs usually pay higher compared to other investments. This is because companies must cash-out 90 percent of their taxable income and distribute it to their investors through dividends.”
Another reason why you should invest in REITs? You’re allowed to “choose to reinvest your income from REITs back, which grows your investment (and income) even further.”
“Willing investors can buy REIT stocks on major brokerage firms (i.e., New York Stock Exchange or NASDAQ) or go for a non-traded REIT. However, if you’re relatively new to the concept, it might be better to stick to publicly traded REITs because it is much more liquid and easier to sell compared to non-traded REIT.”
8. Peer-to-Peer LendingDespite the fact that the peer-to-peer lending (P2P) industry, aka crowdfunding, is over a decade old, there are no signs of it slowing down. And, you can thank platforms like LendingClub and Prosper for letting people directly lend money to others with a click of a button.
9. Information ProductsA tried and true strategy for earning a passive income is creating and selling an information product. Examples include an e-book, templates, webinars, membership sites, or audio or video courses. Then, after investing the time in creating the product, you sit back and wait for the money to flow through your product’s sale. For example, creating an online course can be distributed and sold via Udemy, Skillshare, and Coursera.
Another option is to adopt the “freemium model." Here you would build a following with free content and then charge for more detailed information. A model like this could be used by language teachers or stock-picking advisers. By providing free content, you can display your expertise so that people will be willing to purchase your products.
10. Existing BusinessAnother way to generate passive income? Invest in an existing business. Usually, this will make you a silent partner. That means you provide capital to the business but aren’t involved in the business’s daily operations.
11. RoyaltiesThis is probably the most unique passive investment on this list, if only because few people are aware it even exists. But it’s a true source of passive income, but one with a unique twist.
With royalties, you’ll invest in licensing arrangements rather than securities or properties. As such, you will be able to participate in a range of revenue streams. These can include those generated by music, videos, syndicated TV programs, mineral rights, products, oil, and gas, as well as venture capital financing.
Here’s how it works. Royalties are sold off by the creators or original investors in order to generate immediate cash. Then, you’ll earn royalties on these investments made in those ventures or products. There’s even the possibility of reselling the royalties you’ve already purchased.
Minimize Your Taxes on Passive IncomeA passive income is a great way to generate side income and alleviate financial stress. But you will also accrue a tax liability. Setting yourself up as a business and creating a retirement account can help reduce your tax burden, along with helping you prepare for the future. To qualify for this strategy, you must be an established business.
- Your business needs a tax identification number, which can be obtained from the IRS.
- Then, contact a broker, like Charles Schwab or Fidelity, who can help you set up a retirement account.
- Choose the retirement account that is most suitable for your needs.
The Bottom LineInvestors can greatly simplify and improve their lives by investing in passive income. Each of the options listed above represents a different level of risk and diversification. But, if you are considering passive income opportunities, you must weigh the expected returns against the potential losses.
The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.