Average people settle for a measly monthly paycheck and live for the weekends. Exceptional people look for ways to grow their residual income through a variety of income streams. But with a finite number of hours in each day, itâ€™s not always possible to pick up another full-time job.
If youâ€™re interested in making more money without contributing a considerable amount of additional time, you need passive sources of income.
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What is Passive Income?
In the most elementary sense of the term, passive income is a method of earning money that requires little or no daily effort to maintain. It usually requires some strategy, time, and energy on the front end, but is designed to yield a steady flow of income over time.
According to Dave Ramsey, a thought leader in the personal finance industry, passive income has a few major benefits, including the ability to increase your wealth-building plan, create an opportunity to retire early, protect you from total loss of income in a job loss situation, and provide sources of income to fund retirement.
4 Investments That Create Passive Income
The question is, how do you create passive income? While thereâ€™s no generic strategy thatâ€™s applicable to all, there are a few categories and types of investments that are popular. Here are a few worth looking into:
1. Real Estate (Rental Properties)
Real estate investing is one of the top options for creating passive income. The most convenient and flexible strategy is to invest in residential rental properties that provide monthly rent payments.
New real estate investors generally begin with one property, but the idea is that you slowly build up a portfolio of properties by setting aside your profits and eventually reinvesting them into additional properties. This is known as the snowball effect. While it can be slow in the beginning stages, it can eventually yield thousands of dollars per month in profit.
2. Dividend Stocks
While real estate investing requires some significant legwork at the beginning, there are some other methods that are less time-intensive (though they may not have as much income earning opportunity). Dividend stocks are one option.
Dividend stocks are stocks that actually pay out money to shareholders over time (typically once per year). These dividends are typically small â€“ just a few cents or dollars per share â€“ but add up over time. Once your portfolio grows to a certain amount, you may be able to earn thousands of dollars per year on dividends alone.
â€œAs a rule of thumb, larger and slower-growing businesses are more likely to pay dividends to their investors than smaller, faster-growing companies,â€ The Motley Fool explains. â€œThis is because growing businesses need to retain their earnings to invest in more facilities, stores, employees, and so on in order to grow.â€
Not all stocks pay dividends, so do your research and learn more about how to find these opportunities (and whether they make sense within the context of your larger financial goals). At first, youâ€™ll want to reinvest all of your dividends to grow your portfolio. Eventually, however, you may earn enough that youâ€™re comfortable making regular withdrawals.
3. Peer-to-Peer Lending
If you have some money in hand, you can put it to work by leveraging peer-to-peer lending (which the internet has made accessible to all).
As the name suggests, peer-to-peer lending involves lending money to individuals who need loans, but who arenâ€™t able to work with banks and other traditional lenders (or donâ€™t want to). If you choose the right investments, you can make a healthy percentage on your money in the form of monthly payments (principal plus interest).
4. Virtual Products
If youâ€™re willing to invest time, money, and creative energy up front, you may be able to create passive income through the creation/sale of virtual products like ebooks, online courses, or membership programs. Eventually, after getting these businesses started, you can put things on autopilot and collect regular income without a whole lot of daily effort. Hereâ€™s a good guide on how to get started.
Grow Your Residual Income
Whether youâ€™re looking to grow your income so that you can invest, or youâ€™re seeking an additional stream of income to help you prepare for retirement, thereâ€™s nothing like passive income to help you get ahead. Try some of these investments and see which ones work for you.
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