Author: Chuck Saletta | August 15, 2018
Let the money you already have do the work for you
You work hard for your money, yet your paychecks won’t cover your costs forever. Whether you’re looking to retire or simply to start having some of that hard-earned money do the heavy lifting for you, you probably want to start looking for ways to earn passive income.
Passive income -- or money you earn while you sleep -- can become a tool you can use to cover your costs. That will allow you to focus more of your time on things you want to do rather than on earning money just to assure you have a roof over your head, clothes on your back, and food in your belly. These seven approaches will let your money do much of the work of earning more money for you.
1. Own dividend paying stocks
When you buy a typical share of stock, you become a partial owner of that business. As a partial owner, you get your portion of the rewards of that ownership. That includes any dividends the company declares and pays based on its earnings.
The company’s employees do the hard work of earning the money for you. As a shareholder in a successful dividend paying company, you simply sit back and collect the cold, hard, cash rewards from the financial risk you’re taking with your investment.
2. Own rental real estate
Land lording is a time-honored approach to generating cash. Particularly once you’ve owned a property for a while or if you have the ability to invest in real estate with multiple tenants, it’s quite possible for your rents to well exceed your costs of owning the property.
That said, direct real estate ownership isn’t entirely a passive business. You need to find tenants, take care of maintenance and repairs, sometimes be a bit assertive in collecting the rent, and be able to manage through periods of vacancies.
If that sounds too much like work for your idea of passive income, you can either farm out operations of your real estate to an external partner or you can invest in publicly traded real estate companies. Real Estate Investment Trusts (REITs) are businesses that specialize in owning or financing real estate investments. They are required to pay at least 90% of their income as dividends to maintain their pass-through tax status, which typically leads to higher yields than ordinary stocks offer.
3. Be the silent partner in a business
Many businesses -- particularly in the energy sector -- are structured as limited partnerships. In such a business, the limited partner shares in the profits of the business but generally has no actual responsibility for its operations. In effect, the limited partner provides financial support, while the other side of the partnership -- the general partner -- runs the day to day operations while also sharing in the profits.
The thing to remember with limited partnerships is that they are pass through entities. The partners are responsible for paying taxes on the income the partnership earns, whether or not they actually receive a dime of that income in the form of a distribution. As a result, most publicly traded limited partnerships tend to pay high distributions, to encourage investors to become partners despite that tax situation.
4. Loan money to a company or government
If you want an investment that’s lower risk than owning part of a business, consider lending money to that same company instead, and receive interest income in return. A company’s bonds take a higher priority in the capital structure than its stock does. Indeed, defaulting on a bond interest or principal payment will typically trigger a default, which could cede control of the company from its stockholders to its bondholders. That makes it incredibly likely that if a company can pay its bonds that it will pay its bonds.
If even that seems too risky, you can also loan money to governments, including the U.S. Federal government, which has the ability to print dollars to pay its bonds if it needs to do so. Note, though, that whether you’re loaning to a company or to a government, the tradeoff is that for the lower risk associated with lending vs. ownership usually comes a lower overall expected rate of return.
5. Write options for premium income
On the flip side, if you’re willing to partake in high risk investing, you can write (sell) options to collect the premiums as income. Option buyers pay an additional premium -- known as the time value -- for the right to either buy or sell a stock at a given price on or before a given date. The option writer collects that premium and gets to keep it regardless of whether that person has to make good on delivering or accepting the underlying stock.
Note that collecting that premium is far from a free money investment, however. Options are a leveraged investment, and it’s entirely possible to lose more money than you invested in some option strategies if the market moves against you.
6. Pay off your debts
If you’re in debt -- any kind of debt -- paying that debt off may give you the biggest effective raise of all. Remember that when you’re paying on your debt, you typically pay both interest and principal. The interest is money you’re paying above and beyond what the item would have cost you in the first place had you paid cash up front. The principal payment represents cash flow out of your pocket that you free up to put towards another use once it’s no longer tied to that debt.
While paying off your debt isn’t technically the same as earning money, at the end of the day, it has the same effect on your wallet. After all, money you’re no longer putting towards debt service is money you no longer have to have coming in to cover your costs of living. That gives you more breathing room with your available cash or frees you up to not have to work that much harder to cover your remaining costs. Either way, it represents money doing the hard work for you, giving you more control over your life.
7. Find a fun side hustle that pays you to do what you’d do anyway
Ok, for this one, you’ll actually have to technically do a little bit of "work." Still, if you can find a way to get paid to do something you love doing anyway, you can earn money without it feeling too much like work. For instance, if helping others get in control of their money is a passion area for you, this role as a personal finance writer may be a great opportunity to get paid to do what you’d willingly do for free anyway.
Likewise, sites like Twitch offer you the opportunity to build an audience that will get you paid to play video games. While only a (very) small percentage of those on the site will make enough at it to make a living, if you can legally pick up some spending cash for doing something you’d be doing for free, why wouldn’t you?
More money in your pocket, more time in your day
When all is said and done, you work to cover your costs of living and hopefully have a little something left over to enjoy the rest of your time. The more you earn when compared to your expenses, the greater your opportunity to enjoy more of those 24 hours we all get in a day.
Whether you’re putting your money to work for you, getting rid of the debt service costs that take away the money you’re earning, or figuring out how to get paid to have fun, the end result is largely the same. You get more control over your time and better financial flexibility in your life, and you can put that much less effort into the drudgery of a job you’re doing just to pick up that paycheck. Sounds like a win, no matter how you get there.
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