3 Ways to Turn $1,000 Into Passive Income

You know something the wealthy are very good at? Making their money work for them. When they lie down to go to sleep at night, they want to know that their money is hard at work. The rest of us may not earn millions of dollars as we dream of building another yacht in the Netherlands, but we can steadily increase our net worth by making good decisions about where our money is going to hang out.

Earning passive income is not just for the wealthy. Here's how we can all get started, with as little as $1,000.

1. Purchase dividend stocks

Let's say you purchase stock in the Dang, That Stings Rubber Band Company. You are now a part-owner. Sure, you may own a teeny, tiny slice of the company, but darn it all, you're still an owner.

While not all publicly traded companies do, Dang, That Stings Rubber Band Company pays dividends. A dividend is an amount of money that a company regularly pays its stockholders out of its profits (sometimes referred to as "reserves"). Typically, companies pay out quarterly.

Purchasing $1,000 in stock in a company that pays dividends is one way to produce passive income. You can cash out those dividends and tuck them into your savings account, or you can reinvest them, slowly growing the amount of stock you own in the company.

Note: If you want to invest in dividend-paying stocks, make sure the companies you're interested in pay them.

2. Make like Mr. Monopoly

I can't swear to it, but I've always suspected that Mr. Monopoly is heavily into lending money to Uncle Sam. Here's how I believe he does it:

• First, he goes to TreasuryDirect.gov. That's where he can directly invest in the U.S. government.
• Mr. Monopoly then determines whether he's in the mood for short-term debt like Treasury bills, mid-term debt like Treasury notes, long-term debt like Treasury bonds, or inflation-protected debt like I bonds.

Mr. Monopoly may be flashy, but he's also concerned with protecting his money. Each of these investments is backed by the full faith and credit of the U.S. government.

3. Build an emergency fund

One of the least sexy, but most important, investments you can make is in your personal financial security. Let's say you wake up one morning and rain is coming through the ceiling in your kitchen. Even without being quite awake yet, you realize that it's not supposed to rain into your kitchen. A contractor swings by and you learn that it's going to cost $7,500 to make repairs to your roof, attic space, and kitchen ceiling.

Fortunately, your homeowners insurance will pay the majority of the cost. However, you have a deductible of $2,000 and there's no money in your savings account to cover the cost. You end up putting the expense on a charge card with an interest rate of 17%.

You mean to pay the $2,000 expense off by the end of the first billing cycle, but one thing after another comes up and you can only pay the minimum monthly payment of $50. Before you know it, you've been carrying that same $2,000 debit for 12 months. Unless you can come up with the money to pay the credit card off, you'll carry that debt for another four years and end up paying a total of $972 in interest.

If you don't have an emergency savings account with enough money in it to cover a leaky roof (bald tires, broken water heater, unexpected medical expense, or other unwelcome surprise), you may find yourself paying interest rather than earning it.

Before you look for ways to make your money grow, make sure you have a sufficient amount of money put away for emergencies.

You may only have $1,000 to invest right now, but we all start somewhere. The great thing about having any money to invest is that warm feeling you get when someone pays you interest -- rather than the other way around.