How Do I Create Passive Income?

Dear Kristin,

For someone working full-time hours at a job, what would be some of the best avenues to create passive income (beyond retirement investment accounts)—something that will create cash flow today?

Sincerely,

Dani

Dear Dani,

I love this question. After you start investing and seeing how your money can grow for the long term without lifting a finger (thanks, compound interest!), it’s natural to wonder how you can make that happen right now. You’re looking to increase your revenue streams, and therefore, your income.

So how do you do it? The short answer is: It depends. There are a few different ways to increase your revenue, but since you said you want passive income, it’s clear that you want to have more cash flowing into your bank account without having to take on an extra job or more work. Generally speaking, many people consider taking on side hustles in order to increase their wealth, and it’s possible that some of those side hustles could become passive forms of income or require very little daily work from you, depending on what business you decide to start. 

You could sell physical products through an online store, or sell your expertise by writing an ebook or digital course. A blog or video channel could also generate income if you’re able to secure advertisements. You could also create content that will pay you royalties, like writing a song. These options, admittedly, will require some initial time and effort from you, but there is also the possibility that they’ll keep generating money in the future without your daily input. 

If starting another business isn’t for you, then the best way for you to create a passive income stream is going to be through investing.

For investors, dividends are a passive income stream. But most dividend payouts are, for all intents and purposes, low, so if you want to create a serious boost to your income, you’d have to invest a lot. And not every stock or fund pays dividends.

For example, Apple (APPL) pays a quarterly dividend on its stock. In November 2022, it paid investors a dividend worth 23 cents per share. At that rate, you’d have to own a lot of shares of Apple to earn a hefty dividend payout. Given the amount of money you’d need to see big dividend payouts, this route may not be worth it to you.

But there are other investments you can make. You could invest in real estate, like owning a rental property (or multiple). This is easier said than done and requires upfront costs to buy and rent out a condo or house. You’ll also need to manage the property (or pay someone to do that for you) and feel confident your tenant(s) will make their payments on time. If they don’t, you’ll have to pay the mortgage yourself. 

You could also consider investing in a business. In exchange for your seed money, you can own a portion of the business and therefore receive a portion of the profits.

Only you can decide which of these passive income streams are easiest and best for you. But you’re on the right track thinking of different ways to leverage your time, talents, and even money to generate more income. Sit down with yourself one day and determine how much time, effort, and maybe even money, you’re actually willing to spend to get any of these options off the ground.

Remember: The more hands-off you want to be with your passive income stream, the more money you’ll need upfront to make it a reality. And if you’re OK with increasing your income slowly but surely, you’ll find there are plenty of ways to generate passive revenue.

-Kristin

If you have questions about money, Kristin is here to help. Submit an anonymous question and she may answer it in a future column.

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