Passive Income: How it Works and How to Make it Work for You

What is passive income? Passive income is a strategy of using personal finance and other resources to generate a long-term, recurring income with little or no work. Many people around the world dream of making money when they are asleep, but to a large number of those interested in passive income, it is a pipedream with no tangible results.

The Passive Income Strategy

Passive income is a long-term strategy to help generate income for everything from covering the bills to early retirement. You can use the proceeds however you want. Maybe you reinvest to build your passive income project into a business empire.

It is important to understand that passive income is not passive right away. You usually can’t just write a check and start seeing funds come back to you outside of stock market, annuities and similar financial investments.

Every passive income idea has its own pros and cons, and when passive income is part of a larger business model, there is always some risk it won’t work out. This is why it is so important to consider risk, potential payoff and at least a couple of potential strategies before you lock in on your first passive income endeavor.

Follow Expert Examples

Instead of trying to figure things out on your own, follow a tried-and-true path to passive income that is tested and established by passive income experts who came before you. Also consider picking up a book about any of these topics to fill in any knowledge gaps and improve your odds for success.

Here are three passive income ideas you can consider to get started. Each of these has distinct starting requirements in terms of knowledge, funding and experience.

Dividend Stocks

One of the easiest and fastest routes to near guaranteed passive income is dividend stocks. For those unfamiliar with the stock market, some companies pay out a cash payment every quarter to shareholders called a dividend.

The average dividend for stocks in the S&P 500, an index that represents 500 of the largest public companies in the United States, has hovered around 2 percent for the last decade. That means for every $100,000 you invest, you would get $2,000 in annual dividends in return.

Of course, you can implement a strategy that goes heavier on high dividend stocks, but as with any investment there is a risk you could lose some or all of your initial investment. Also, while dividend rates tend to increase, it is far from unheard of that a company may slash or cut its dividend rate during times of financial stress.

Real Estate Investment

Do you dream of sitting on the beach sipping pina coladas while your investment properties pay you automatically each month? Real estate is a popular route to passive income, as it is generally stable and predictable and offers a long-term payoff.

Real estate is a great passive investment because the property can grow in value over time while your tenants pay off your mortgage. You get a profit along the way. But real estate is not all rainbows and roses.

For real estate to work as a passive investment, you will need a property manager near the property. And those don’t always come cheap. Do your research to pick the right manager for your property and needs, not just the cheapest or closest option. But once you own the property and everything is all set, you can sit back and enjoy the cash flow.

Online Business

A newer path to passive income emerged with the rapid growth of the internet. This online world opened up the door to something else that didn’t exist before the internet: online business.

Books such as The Four Hour Workweek by Tim Ferriss explain how you can build a small business from home that takes very little time and effort to manage. Using online marketing strategies, outsourcing and automation, you may be able to build an online business that pays you every month with only a little work and upkeep.

However, the internet is a crowded place with people all over the world looking to sell products and services. They may be able to beat you on price and send your passive income stream to zero. Online business is one of the most difficult paths to passive income, but with only a little overhead and relatively low startup costs, you may find success.  

How to Put Passive Income Dollars to Work

If you do get a passive income project up and running, your next job is to decide how to use those dollars in your bank account each month. After dealing with taxes and related costs, you should have a nice profit to do with whatever you choose.

If you are earlier in your career, reinvesting and building a larger passive income portfolio may work for you. Diversify your passive income methods and build them larger with the proceeds. That way, when you are ready to draw from your passive income pipelines in the future, you will get bigger paydays.

If you are in or nearing retirement, you may want to save or draw on the funds to pay living expenses. Even if you do love work and want to keep active through business in retirement, it is nice to know you don’t have to go to work. And that income can help pay your rent, mortgage and other living expenses. Or maybe it serves as extra income on top of retirement savings to pay for travel, golf games and other adventures.

Making Passive Income a Reality

Depending on your goals, skills and assets, passive income may come from the stock market, physical assets or a new business. There is no right or wrong. All that matters is what you make work for you.

 

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