Everyone knows how to make money the hard way, get a job. What if that job does not pay all your bills? Well, then you need a side hustle. Most of us need to make money the hard way. There is no avoiding it.
But there is another way to make money: a much easier method, passive income. The idea of making effortless money might sound like a dream to most people. But it doesn’t have to be. It won’t happen overnight, but with time and discipline, it is possible.
Here is what we are trying to avoid.
“If you don’t find a way to make money while you sleep, you will work until you die.”
Nobody wants to work until they die. Here is how you can get started making sure that doesn’t happen.
Pay Yourself First
Before we get into three great ways to make passive income, here is the most important rule. Pay yourself first. When I say first, I mean it literally. Pay yourself 10% before you pay any other bills.
If you try to pay yourself later, you open yourself up to a million excuses not to do it. Once it becomes a habit, you will not even notice it. It will be just like that money taken out of every paycheck for social security.
Put that 10% into a brokerage account. Then, use that money to invest in things that will produce passive income.
Here are the three most common ways to earn passive income.
1. Intrest Paying Bonds
Banks make a killing, loaning people money. Have you ever thought about doing something similar? A bond is a loan taken out by a company. The only difference is that companies get bonds from investors instead of banks.
An interest-paying bond pays interest regularly. Usually, interest is paid either annually or semi-annually. The company then returns the full bond amount on the agreed-upon maturity date.
After the initial purchase of a bond, there is no effort required on your part. You can sit back and watch the interest payments roll in. The only real risk on your part is the company going out of business. So be sure to pick good companies when looking to buy bonds.
2. Dividend Stocks
There are two basic types of stocks. Stocks that pay a dividend and stocks that don't.
A dividend is a payment that companies make to their stockholders. When a company is small, it usually reinvests all of its profits into growing the business. Once the company reaches a specific size, it often starts to pay some of its profits back to the stockholders.
Just like bonds, dividend stocks require no effort on your part after your initial purchase. You can sit back and watch your dividends roll in. Dividends are usually paid out either monthly or quarterly.
It has been said that 90% of millionaires became rich by investing in real estate. The only problem with investing in real estate is that it can be a hassle. You need to spend time finding good deals, you need to find tenants if you are renting, and you are responsible for fixing anything that breaks.
You can hire a management company to handle all of that. But that still would not be as effort-free as bonds or dividend stocks. REITs are a much easier option.
REIT stands for Real Estate Investment Trust. It is a trust that owns multiple real estate investments. You can buy into the fund and receive a portion of the profit every month in a dividend form.
All you have to do is pick the right REIT and receive your monthly or quarterly dividend payment. You don’t have to deal with any of the headaches that normally come with real estate investing.
Warning About Diversification
It is risky to put all your eggs in one basket. When investing, you want to protect yourself from complete financial ruin. That way, if one of your investments turns bad, you don’t lose everything.
Here are the two main ways to diversify your investment portfolio.
1. Different Asset Types
It is tempting to pick your favorite type of investment and stick with it. For example, people who really like real estate might want to only invest in real estate. That would leave you exposed when the real estate market hits a downturn.
The best strategy is to have all three types of investments in your portfolio (stocks, bonds, and REITs). But, if there is one type of investment you like more, you can have more of that in your portfolio.
2. Different Assets of Each Type
To take your diversification a step further, you need to own more than one of each type of investment. You can do that by buying many different bonds, stocks, and REITs. However, that would be a little too time-consuming.
A better option would be to buy ETFs. An ETF is an exchange-traded fund. It is basically a basket of each. It can be bought and sold just like an ordinary stock.
A Bond Fund ETF would be a basket of bonds.
A Stock ETF would be a basket of stocks.
A REIT ETF would be a basket of REITs.
ETF makes it easy for you to achieve diversification with one purchase.
Generating a regular income without working is the dream for most people. However, it is doable if you are both patient and consistent. If you pay yourself first and invest that money, you will eventually earn a respectable amount of passive income.