Income Generation: Make Money While You Sleep
You work hard for your money. Countless hours are endured at a desk, in a cubicle, perhaps in adverse outdoor conditions. You need your money to work as hard, or harder, than you do. Since we all have limited amounts of hours we can work, income generation outside of our normal jobs is vital.
I don't know about you, but the idea of slaving away until age 70 doing something I don't enjoy doesn't sound appealing.
But how do we escape?
In the same way debt never sleeps, income generation created passively doesn't sleep either. Weekends, holidays? No problem, the money is working for you.
If you structure your affairs correctly, you can have multiple streams of income outside of your nine to five job to make life just a little easier.
Passive income gives you the freedom to:
- Provide more money for your family.
- The ability to retire early.
- Find a more enjoyable job that potentially pays less.
- Start a small business in a field of interest.
- Work less hours to spend more time with family.
Are you ready to escape and find your freedom today?
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Income Generation From Passive Sources
Let's take a look at some tried and true income generation methods to keep money rolling in outside of your day job as passively as possible. These methods do require upfront capital and some research time, but are not labor intensive.
1. Dividend Stocks
One of my favorite sources of passive income is dividend investing. A dividend is a payment (usually quarterly) made from the corporation to its shareholders in order to return some profits to their investors.
Dividends, once received, can be rolled into a checking account and spent as you wish. However, many find it advantageous to reinvest the dividends back into stock creating more shares or to purchase other stocks. This creates a compounding snowball which starts slowly but picks up speed after years of diligent investing.
Selecting the right dividend stocks can take some time to research. An alternative approach would be to invest in broad market, low cost index or mutual funds. These have typically lower yields, but are usually the safer approach for inexperienced investors or those who don't find enjoyment in selecting individual companies.
As with all investments, taxes are a concern. The good news is that dividends are taxed only at 15% if you are at or below the 35% tax bracket. Dividend tax jumps up to 20% when you hit the 37% bracket.
One of the best ways to invest in dividends is through a slow but steady investment strategy. Also known as creating a snowball effect. Timothy McIntosh explains it well in The Snowball Effect: Using Dividend & Interest Reinvestment to Help You Retire on Time.
This book provides a clear understanding of the basics of investing in the stock market and a specific plan for increasing wealth through reinvestment of dividends and interest payments.
2. CD's (Certificates of Deposits)
Want a low risk, truly passive income generation source? Take a look at CD's, the short name for certificates of deposits. CD's are promissory notes issued by banks, generally with 1-5 year term lengths. These are a great option if you don't think you will need to touch your funds for awhile as they are a time deposit. And generally the only fees associated with CD's are if you take money out before the maturity date.
Aside from not being able to touch your money for a period of time, the other negative is rate of returns with CD's are generally lower than stocks. However, there are certain times when the economical conditions are excellent for CD's. One example would be if the stock market becomes over valued or if the Federal Reserve raises interest rates to an acceptable level.
It is worth your time to make a phone call or to do some online searches to find what rates banks are currently offering!
Here is a short video describing a CD ladder strategy to put your money to work for you.
3. High Yielding Savings and Money Market Accounts
I'll be honest, you probably won't make a killing going this route. But holding your money in a high yielding savings account or a money market fund is almost always better than letting it sit in a regular checking account. Not only is the money more accessible, but it gives you a better shot to keep up with inflation vs a checking account producing something like .005% interest.
Make sure the accounts are FDIC insured before placing a sizable amount first however.
4. Municipal Bonds
Municipal bonds can be a great way to build some wealth and skip out on some taxes as they are generally exempt from federal income tax. Also, if the bond is issued from the state you live in, it might be exempt from state tax as well. "Munis" are basically loans issued to a city or state with the promise to pay you back interest, usually semi annually, and the principal once the term of the bond is completed.
Short term municipal bonds are typically in the one to three year range. Long term bonds can extend out over decades, but locking up money for that long is something I wouldn't advise.
5. Passive Real Estate
One of the best ways to make money historically is from real estate. Since we are focusing on truly passive income generation, we'll cover REITs (real estate investment trusts) instead of purchasing physical structures such as apartments or rental houses. While management companies can do a lot of work for you, owning physical real estate takes a lot of work and is hardly passive.
A real estate investment trust is a company that combines money from investors to purchase and operate income producing real estate. Some REITs own shopping centers, restaurants, even senior living facilities. By investing in REITs, you earn typically a higher dividend yield than individual stocks and you don't have to deal with landlord duties!
There are some excellent publicly traded REITs with dividend yields around 5-6%. The advantage here is accessibility since your money isn't tied up and you can sell or trade as you wish.
Another option would be to invest in private REITs through a broker. Private REITs don't typically have the volatility as their counterparts but aren't as easy to manage either.
The key with private REITs is to have a broker you can trust. Many of them suggest private companies that give them the biggest kickbacks. Some brokers are out for their own best interests and not yours, the investor. Be cautious if you go in the direction of a private REIT.
6. Earn Credit Card Reward Points
If you are going to spend money, you might as well get a little reward for doing so. I try to put as much of my monthly bills on a credit card for this reason. Credit card rewards gives you points or cash back for every dollar you spend.
Certain cards will reimburse you in money back, travel miles, or gift cards.
Many credit cards will give you extra points just for signing up. This strategy to accumulate rewards points is only effective if you pay off your credit card balance in full every month. Don't fall behind and be forced to pay credit card fees!
Start Building Your Income Generation Machine
No matter the economic climate, there is always something intelligent you can do with your money. Rather than letting inflation eat away at your cash, put it to work! I like to think of each dollar as an employee. Employers don't want lazy employees, and I don't either.
Admittedly, it's easy to be complacent with money. Seeing money accumulate in the checking account is fun. And honestly, it's a comforting feeling seeing it sit there. But once you have a nice emergency fund built up, it's time to take action.