Investing in assets that generate income is a smart way to earn passive income. You can use this passive income however you like. If you want to reduce debt that is great. Save extra money for a vacation even better. Reinvest them to compound your passive income that is wonderful. The beauty of this strategy is the earn more money without doing anything. I setup the list from familiarity and "safety" (nothing in life is 100% safe).
- Certificates of Deposits (CDs): A low risk financial product offer by banks Basically you lend the bank money for a fixed period of time at a fixed rate. For example" A 12 month CD is offering 2% APY. One deposits $10,000 and you will earn 2% for 12 months relatively risk free or receive $200 at the end of the 12 month period. CDs are insured by FDIC up to $250,000. If interest rates drop during the 12 month period you are protected because you will continue to earn 2%. The disadvantages are if interest rates rise during the 12 month period you will not be able to take advantage of the higher rates. If inflation rate is higher than 2% in real terms you are actually losing my money. Finally you are locked in the for 12 month, so your money is stuck, if you withdraw prior to the expiration date the bank will charge you a penalty fee.
- Bonds or Fixed Income Securities: Fixed income products or securities very similar in structure as CDs. However, instead of lending your money to a bank, you will be lending money to a government or corporation. Just like CDs, bonds pay interest and offer many time periods to lend them money. For example, let's say you lend Government ABC $10,000 for 20 years at 4% interest. Typically Government ABC will pay you semi annual interest of 4% or 2% every 6 months for 20 years. At the end of the 20 years Government ABC will return your $10,000. Bonds are riskier than CDs because governments and corporations may go bankrupt which means you may not get the full amount of initial investment as promised.
- Real Estate Investment Trusts (REITs): REITS are portfolio of properties operated by a company to takes money from investors to purchase and develop properties. Think of REITs like mutual funds, you send them money and they use your money to buy real estate. In return REITs will pay you typically a quarterly dividend (sometimes monthly). The beauty of REITs is you can own a vast number of properties without trying to get financing from a bank, being a landlord and paying property taxes directly. REITs unlike real estate are highly liquid in most cases. You can buy and sell at anytime without a real estate agent of bank approval. Also this is my favorite part about REITs, you can own cell towers, shopping malls, skyscrapers, rental properties and other types of real estate. How many of your friends can say I own a skyscraper? The downside of owning REITs are you have to share all rental income with other shareholders and operating company. Also you REIT share price will fluctuate second by second and subjected to interest rate risk. Interest rates will impact REITs because they still have to borrowing money to buy properties. Just like a people have to put down 5-20% before buying a home and get a mortgage from a bank.
- Dividend Paying Stocks: Some companies payout a portion of their earnings in the form of a cash dividend. Typically very large corporations offer dividends to their shareholders. Dividends are a good way to get cash from a corporations profits. Since you you must own the stock get paid a dividend you are considered an owner of the company. Another great benefit is the company may raise the dividend payout unlike bonds or CDs you are stuck with current rate. Think of this as getting a raise at your job. However they are risks in owning dividend paying stocks. A corporate may go bankrupt or get into cash problems thus eliminating or reducing the dividend payment and no guarantee of return of your initial investment. Your initial investment will be impacted by the second by second movements of the company's stock price. If you follow the stock market second by second you will get a panic attack and vomit while going on an emotional roller coaster.
- Rental Property: This goes without saying but i will explain it anyway. You buy a home, homes or buildings and you rent them out. You as the sole owner or co owner collect rents. Wow frigging easy. Just like that you can make really good money. But wait, here is the catch. First you will have to come up with a down payment, typically 20% is best to avoid private mortgage insurance fees and easier bank approval for mortgage. Secondly if one or many people don't pay their rent for a long period of time you are screwed because you will have eat the cost by paying the mortgage to the bank and hire a lawyer to begin eviction procedures. You will be subjected to the local laws governing eviction process with a judge typically having full discretion into interrupting those laws. Just writing this gave me a head ache.
There other methods to earn passive income such a peer to peer lending however i am not a fan of this because the risks in my opinion are higher due the person on the other end borrowing the money. As for the bonds, REITs, and dividend stocks, I recommend buying very low cost exchange traded funds and or mutual funds such as Vanguard. If you can't invest on your own hire a financial advisor who is a fiduciary. Trust me you want a fiduciary as your financial advisor.
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