It seems like all anyone talks about lately are side hustles. But isn’t that just the same thing as passive income?
Although there is some overlap between activities that could be considered either passive income or side hustles, the two concepts are actually very different.
Passive income is when you earn money with little to no effort. Even though that might sound impossible, it is a real thing that lots of people are taking advantage of all of the time. Though there is often some up-front work that has to be done to get a passive income stream going, once it’s in motion, the maintenance to keep it functioning should be minimal.
By contrast, a side hustle is when you earn money for doing work that is outside of your normal job. Driving around for Uber, Lyft, or for DoorDash on the weekends would be considered a side hustle. Notice how with a side hustle you still have to keep working if you want to continue to earn money. Again, if you stopped driving for Uber, then you would no longer make any income. But with passive income, the money continues to flow, even while you’re asleep at night. That’s the great thing about it!
So if you’re looking for something more than just a side hustle, then here are five great recommendations for how to make passive income.
Investing your money is easily one of the best ways to earn a passive income. When compared to other things you could be doing with it, investing is a great long-term strategy to make your contributions multiply over and over again.
The thing that makes investing so great is the power of compound interest. This is when you earn money on top of the money you contribute as well as all of your previous earnings.
Take, for example, a situation where you invest $6,000 every year ($500 per month) for the next 30 years. If you had simply put that money in a bank account (earning almost no interest at all), after 30 years you’d have $6,000 x 30 = $180,000.
But if we invest that money into a stock market fund that grows by an average of 10 percent annually, thanks to the power of compound interest, you’d potentially have almost one million dollars. That’s a growth of over 5 times your original investment!
(You can try your own numbers using this free compound interest calculator from Investor.gov.)
Invest In an Index Fund
Not too sure about investing in stocks? Why not play it safe and simply buy the whole market by investing in something called an index fund. An index fund is simply just a financial asset (usually a mutual fund or ETF) that contains all of the same holdings as a major market benchmark, such as the S&P 500.
Currently, the long-term average return of the S&P 500 index is 10 percent. That’s not too bad, especially when you find out that most professional fund managers can’t even beat this benchmark.
Another great alternative for getting into investing is to use a robo-advisor. This is just a computer program that picks your investments for you based on your tolerance for risk and growth targets. Some of the top choices right now are services like Betterment and Wealthfront.
Use Your Retirement Accounts
Don’t forget: If you invest inside of a tax-sheltered retirement account such as an IRA or your 401(k), then not only will you harness the power of compound interest, but you’ll also get to defer taxes on your contributions as well as any earnings you make for decades!
Dividend stocks are another great example of a truly passive income stream.
These are simply stocks where the company pays the shareholders a percentage of their earnings every quarter (called a dividend). Earning passive income from dividends is as simple as buying stocks and collecting a paycheck.
To illustrate this, let’s say you had $1,000,000 invested into dividend stocks and they had an average dividend yield of 4 percent. That means you could expect to be paid $40,000 every year (or $10,000 per quarter).
Good dividend stocks aren’t very hard to find. One of the best places to start looking is from a list known as the Dividend Aristocrats which are companies that haven’t lowered their dividend payments in 25 years. You can buy them yourself through a reputable discount broker such as E-Trade or TD Ameritrade, or you could invest for cheap using a robo-advisor such as M1 Finance.
You’ve probably heard some people describe rental properties as being passive income. But then the thought of collecting rent every month and dealing with tenants doesn’t sound very passive at all!
If that sounds like you, then there’s a better alternative. What you need is something called a REIT or real estate investment trust. This is a company that owns and operates income-producing real estate such as apartment buildings, medical facilities, offices, hotels, etc. Basically, it’s a way to invest in real estate without all of the hassle of actually buying any real estate!
Similar to dividend stocks, the big attraction to REITs is that they payout at least 90 percent of their taxable income to shareholders. According to the Motley Fool, the average REIT dividend is approximately 5 percent. Again, that’s for doing nothing else than just being a shareholder!
Don’t Rule Out Rental Properties Yet …
By the way, there’s still a way to invest in physical rental properties without the headache of dealing with bad tenants or house maintenance.
Look into hiring a good property manager to take care of all of those tasks for you. Property managers are ideal, especially if you own multiple rental properties. Though they will of course cut into your profits, they could end up saving you a lot of wasted time. Check for local listings in your area or check with the National Association of Residential Property Managers (NARPM) for potential options.
Peer To Peer Lending
Think banks are the only ones who can lend people money? These days, you can be your own bank and earn some decent passive income too by getting into something called P2P (peer to peer) lending.
P2P lending is when you invest your money into other people’s loan requests through a P2P platform such as Lending Club. You simply pick the loans that sound good to you, invest your money, and then sit back and collect repayments every month from the borrowers for the next 3 to 5 years.
Because of the relatively high-interest rates P2P platforms can charge, some people boast investment returns of greater than 10 percent. However, just like real banks, be aware that sometimes the borrowers do default on their loans.
Selling and publishing ebooks on Amazon on a great example of an activity that takes a lot of up-front effort, but then it can go on to generate passive income for years to come.
To get started, all you need is a laptop and a good idea for a book that people will want to read. Whether its fiction or non-fiction, be prepared to invest some time and energy into writing the manuscript, having it professionally proofread, and designing a front cover. (Or you can pay someone to do all of these tasks for you.)
After your book is published and some initial marketing is done, that’s it. Your book stays listed for as long as your account is active, and that means you could be making sales for years after its publication. Who knows? You might even get lucky like this author who turned his crime-thriller fiction series of ebooks into $450,000 of passive income.