If you’ve ever read an article about passive income, then you might be miffed that half of the ideas aren’t actually passive at all. In fact, some of them sound like a 2nd or 3rd job. That sounds horrible. Instead, we’re going to explore passive income ideas that require little to know work. You might have to do some research from your couch, but that’s about it.
Before we jump in, let’s cover some basics of passive income.
What Is Passive Income?
Passive income is money you make without having to do much for it each day. Imagine if you had a machine that made money while you’re sleeping, playing, or studying, and all you had to do was check on it from time to time. That’s what passive income is like.
Recommended Reading: The Richest Man in Babylon was published in 1926, and is filled with timeless lessons in personal finance. If you’ve ever read a modern personal finance book, you will most likely find many of the same ideas. These ideas are told in parables set in ancient Babylon. They’re incredibly easy to understand, and it’s a quick read. We highly recommend it over many other personal finance books.
Passive Income Ideas: Earn While You Sleep
As a reminder, we’re not interested in side hustles in this post. Those serve a different purpose in your personal finance journey. Today, we’re going to explore completely passive income ideas and the vehicles that can help you reach your goals.
Dividend Exchange Traded Funds (ETFs)
When it comes to completely passive income, few options are easier than ETFs. The long term average yield for the S&P 500 (a collection of 500 of the largest companies listed on stock exchanges in the US) is 1.87%. That’s not super exciting. However, it’s a great way to start your investing journey and let compound interest work its magic.
There are over 2,700 ETFs available in the US to pick from. We’re going to narrow things down to higher yielding ETFs, which include a focus on paying dividends.
Dividends are typically cash payments from earnings made to shareholders (investors). These payments are typically made quarterly, but some will pay semi-annually, annually, or even monthly. ETFs wrap these companies up in a basket for you, creating a diversified investment vehicle.
Dividend ETFs Worth Researching:
- Schwab U.S. Dividend Equity ETF™ (SCHD) – 3.58% Yield (as of 8/1/2023)
- iShares Core Dividend Growth ETF (DGRO) – 2.39% Yield (as of 8/1/2023)
- Schwab International Dividend Equity ETF (SCHY) – 3.67% Yield (as of 8/1/2023)
- Vanguard High Dividend Yield Index Fund ETF Shares (VYM) – 3.14% (as of 8/1/2023)
All funds mentioned are featured on Charles Schwab’s ETF Select List.
Private Market Investments: Real Estate
You may have heard that real estate investing offers passive income. That might be true for some mega wealth investors that use a property management company to deal with an overflowing toilet at 3am. If that’s not you, then being a landlord might sounds an awful lot like a full time job. That’s because for most rental property owners, it is one.
Private market investments (not listed on an exchange like the dividend ETFs mentioned above) are typically reserved for accredited investors (rich folk). However, technology has broken down some barriers to private markets.
Fundrise is one of the largest real estate private equity investors in the US. They have created a platform that gives investors access to real estate through private REITs (real estate investment trusts). Their real estate funds give you access to multifamily apartments, industrial properties, and single family rentals.
We like Fundrise because they’ve created a unique, easy to use, and accessible platform that is truly passive. The minimum initial investment is just $10. You can select between Supplemental income, Balanced Investing, and Long-term Growth plan. More seasoned investors might enjoy their Pro plan, which allows for more customization in portfolio building.
Income from Fundrise comes in the form of quarterly dividends. The source of those payments can come from loan payments, rents, or return of capital.
(Formally) Boring Bonds
If that was your first reaction, then you’re not alone. Bonds are boring, but that’s what makes them great. The Federal Reserve has been raising rates for the last year and a half, and bonds might look a little less boring to you now.
In 2021, the 1 year US Treasury rate hit 0.04%. It’s now sitting at 5.37%, and it comes with tax benefits. US Treasuries are tax exempt from state and local income taxes, which make their current high yield look even better.
Bonds are a fixed rate of interest paid on debt funded by an investor. The United States is known as one of the safest bond bets to make.
The US Treasury issues different types of debt securities. These are some of the most popular:
- Treasury Bills: Short term securities which mature in 1 year or less, the interest is the difference between what you paid and what the face value of the bill is when it matures
- Treasury Notes: Mature in 2, 3, 5, 7 and 10 years. Notes pay interest every 6 months
- Treasury Bonds: Mature in 20 or 30 years, pay interest every 6 months
How to buy Bills, Notes, and Bonds: You can buy these securities directly from the US government on TreasuryDirect.com, through your brokerage account (ie. Vanguard, Charles Schwab, eTrade, etc), or you can own baskets of them via ETFs.
The Certificate of Deposit (CD) Is Back
After years of zero interest rates, the certificate of deposit is attractive again.
A certificate of deposit (CD) is kind of like a special savings account, but with some rules. When you put your money in a CD at a bank, you promise to leave it there for a certain amount of time. This time can range from a few months to many years. The bank rewards you for this by giving you more interest (that’s money the bank pays you) than a regular savings account.
For example, let’s look at CD rates as of 8/2/2023. A 3-month CD pays 5.30% interest, a 6-month CD pays 5.31%, and so on. The longer you agree to leave your money in the bank (like 5 years or 10 years), the more interest you usually earn.
But here’s the catch; if you take your money out before the agreed time, you usually have to pay a penalty. So, CDs are a good idea if you’re sure you won’t need that money for a while. It’s like letting your money have a long, relaxing vacation where it works for you by earning interest, without you doing anything else.
Distribution schedules (aka “coupon frequency”) are different depending on when the CD matures. Many CDs under 12 months will accrue interest daily, but will distribute the interest when the CD reaches maturity. A 2 year CD might have a monthly, quarterly, or semi-annual coupon frequency. This is important to know if you’re depending on this passive income.
You can purchase CDs from banks directly, or purchase them through your investment account (ie. where you buy stocks, ETFs, etc).
Small Business Investor for Passive Income
This is the highest risk passive income idea that we’re going to cover in this post. As we mentioned early on, we are looking for the zero sweat way to earn money. Getting a second job isn’t the goal here. So why would you want to get involved with a small business?
We think there are a few great reasons to become a small business investor:
- You get to support your local community
- It can be incredibly satisfying to see something you helped start in real life
- You’re giving someone a chance that others might be skipping
Those all sound like very esoteric and risky reasons. Right? Good. We want you to make wise money life decisions. Before we dive in, here are a few different ways you can invest in small businesses (even if you’re not accredited).
Getting Started as a SMB Investor
Popular Types of Small Business Investments:
- Friends & Family funding
You will also need to decide if you want to make an equity (become an owner) or a debt (become the lender) investment in a small business.
There are pros and cons to both. If you decide to make an equity investment, you’re also taking on a similar amount of risk/reward as every other owner in the business. Things might go great, and you have the potential for high returns. The business could also fail, and you could lose your entire investment. Your level of passive income will vary between businesses.
Debt investments carry lower risk, but your potential reward is also limited. You’re also limited in how much say you have over business decisions. As a debt investor, you’re getting paid interest on the loan your provide until it is paid off. There’s your passive income.
No matter what, read the fine print and agreements very carefully. Discuss potential investments with a licensed financial advisor.
Wrapping Up on Passive Income
There you have it. Five easy, no sweat required passive income ideas. Remember, these are just ideas to help you get started. Write down your passive income goals, discuss with a certified financial advisor, and make a plan.
The number reason why retail investors (people that are not professional investors) underperform with their investments is because they don’t have a plan. You may sell an investment too early or too late – all because there wasn’t a plan in place that was customized to your risk tolerance.