My 3 Streams of Passive Income

Dear Health & Wealth Seeker, 

This morning, as I was enjoying a cup of green tea with ginger, someone asked me a question. The person asked me how he could make more money. I’m going answer this right now: Passive income is the answer.

The young man that asked me this question has a job. So, I mentioned ways that he might possibly get more money from his job. He indicated that the ways that I mentioned were not possible. Working a side gig was mentioned. He said that he did not have the extra time because he was already working overtime at his job. So, what could he do? This is when the idea of passive income came up. 

What is passive income?

Passive income is income made with little to no activity. You do not have to do something regularly to make it. Passive income is usually created by investing money or doing something once for which you continually get paid. An example of passive income is income earned by owning a rental property that you do not manage. 

What is not passive income: 

Any income earned from you working on an on-going basis is not passive income. If you are trading your time for money, that is not earning passive income. If you have a job for which you are paid, that is considered earned income. When you earn active income by working for someone else, that is earned income, not passive income. However, even if you work for yourself, you are working for earned income if you have to keep doing the work to keep the income coming in. You can exchange labor, goods, or services for earned income. Even tips are considered earned income. The thing about earned income is that when you are no longer working, either by choice or not by choice (such as becoming injured), the flow of income ceases. 

Is passive income taxable?

All income is taxable. So, when you make passive income, you will need to set aside some of the income to pay the taxes on that income.

Why is passive income important?

You can start building wealth when you have passive income. Since passive income does not consume lots of your time, you can keep increasing your passive income, even while you are working at your earned income position. Furthermore, one source of passive income, dividends, is taxed at a lower rate than the money you make from earned income. Less money paid for taxes means more money for you to keep, and more money to build your wealth. Why the heck would you not want some passive income!

My 3 Streams of Passive Income

Interest:

To earn this money I basically lend my money to the banks by depositing it and letting it sit there. 

The money that I gain interest on is mostly my emergency funds. Since emergency funds need to be liquid, I keep the money in interest bearing instruments, However, the interest paid by the average bank is not high these days. But, I try to get the highest interest rates that I can get. Afterall, when you have money in a bank, the bank makes lots of money off of your money. So, at least I can try to make as much money as I can from the banks. I have two main sources of interest for my emergency funds: Savings & Checking Accounts and Certificates of Deposit.

Savings and Checking Accounts

For my savings and checking accounts, I don’t just rely on a local bank. Instead, I look for high-yield accounts. These can often be found in online-only banks. Online-only banks can offer higher interest rates because they do not have the cost of paying rent for brick and mortgage locations. One example of a bank with a high-yield savings account is CIT. I have an account there. But, there are other online-only banks. There numbers are growing. 

Certificates of Deposit

For certificates of deposit (aka CD’s), I like to go through a brokerage house, like Fidelity or Schwab. When you buy CD’s directly from a bank, that bank only offers their own CDs. However, when you go through a brokerage house, you can buy CD’s from a variety of banks, by using your one brokerage account. Also, when you buy a CD through a brokerage account, you can compare competing interest rates for the same length of deposit. For instance, the interest rate paid on a 1 year certificate of deposit may be higher at one bank than another bank. 

Stock Dividends:

Dividends are one of my favorite sources of passive income. Stock dividends are earned by owning shares of a company’s stock. When you own a company’s stock you are a fractional owner of the company. When you own shares in a company, some companies pay the stockholders for owning the shares. If you want to earn dividends, be sure to buy stocks that are dividend payers. Dividend paying stocks are considered value stocks. This is in contrast to growth stocks, which do not normally pay a dividend. When people buy growth stocks, they expect to earn money through the stocks’ appreciation. When you own growth stock, the standard way to get money out of the stock is to sell the stock after it appreciates in value. I do not focus on growing my income with growth stocks.

Instead, I focus on growing my dividends. I am building my dividends with the goal of paying a specific fixed bill. I picked a fixed bill payment as a goal because I thought it would be easier to focus on a set target rather than a moving target (of a bill that varies each month.). 

Real Estate Investment:

I consider real estate one of the three main ways to build wealth. So, of course I have money invested in real estate. I think that real estate is a great investment because there is a limited amount of land on earth, and at the same time, the population of the planet is growing. Furthermore, once you get to the point at which you can purchase rental properties, you will be able to enjoy additional tax benefits. There are many tax deductibles for rental property owners.

Being a young investor, you may not have money to buy a rental property, yet. That’s okay, most people don’t start making money by buying physical properties first. The money is earned other ways, until they have enough money to invest in physical real estate. But, there are several ways to invest in real estate passively. One way that you can start is through purchasing Real Estate Investment Trusts. These can be purchased through the same places where stocks are bought. 

But remember this:

Passive income takes time to build. But don’t get discouraged. Just start, with whatever you can. Whatever you can put into creating passive income today, will give you more passive income than yesterday. However, if you never start to build passive income, you will definitely have zero. 

Passive income is great! Get started on yours today!

Hugs, 

Rich Mom

Do you want to read more of a mom’s letters written to inspire financial independence by age 30? Check out:

Why Should I Invest?

Ten Secrets to Building Wealth

5 Suggestions on How to Live Below Your Means – Hint: This leaves more money for investing.

Wondering About Rich Mom? 

If you stumbled upon this post and you are wondering who Rich Mom is: I am a tea lover and a mother to a young adult. My majors and degrees are in business, economics, and education, and I am passionate about financial literacy and personal finance. I am worried about the future of young adults who are often being burdened by massive student loan debt, but at the same time have never been taught about financial literacy.

So many people work forever.

So many people work, forever living just paycheck to paycheck, never understanding the pattern that would make their lives easier. My goal with my blog is to inspire those ages 30 and under to become more financially literate, become financially independent, and be able to live a healthy (mentally and physically), happy, generous life, in which you can help others do the same. But remember, my blog is intended to inspire, but not as investment advice. 

I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor. 

Also, remember that past performance is not a guarantee of future performance.