Passive Income Ideas
If you have ever read the book “Rich dad poor dad,” by, Robert Kiyosaki, then you must be familiar with the term ‘rat race.
According to Wikipedia, rat race refers to a self-defeating, endless, and pointless pursuit of financial freedom. Humans in this analogy are equated to rats attempting to earn a reward e.g., a block of cheese, in vain.
What Kiyosaki was trying to say is that; You may work extremely hard in your life, following a repetitive routine that keeps you too busy to enjoy life or spend time with your family and still end up a poor man at the end of the day.
The difference between a poor man and a rich man is working smart. I will explain this to you.
Passive income ideas, are money making ideas, that enable you to keep receiving payment over and over and over again, with a single investment. Okay, what I mean is, you will need to make an initial investment, and then after that, you can sit back, relax, and wait for your money to work for you.
Many rich people have employed this tactic, which leaves them to enjoy their lives because whether or not they go to work, their money will continue making more money for them.
The concept of passive income has perplexed many people who are curious to find ways of making money without having to work, which sounds like a dream.
I will give you a few passive income making ideas, but before that, here are some things you need to know
Passive income streams
Although ‘passive' is a word that makes you think that you do not need to do a single thing, this is not necessarily true. Passive income requires upfront cash or time investment. Time investment means that you will have to do something that will take a significant amount of time on your part.
Once you input an initial investment, and a lot of hard work, this investment will build itself and manage to maintain itself, to the point where you will have a consistent revenue that will not necessarily require too much input from you.
Adding a passive income stream to your portfolio will go a long way towards increasing your income and accelerating your potential for financial growth and stability.
Let's get started;
Passive income ideas
All of the ideas in this category require some initial capital. Do not be alarmed by the word cash investment, because it could even mean $5. What we are saying is that you cannot invest without injecting some money into it.
A stock investment
A stock investment will earn you dividends. Dividend income is great if you are willing to patiently wait, and give the company you have invested in time to grow and increase their profit before tax. The higher this profit, the higher the payout to the investors.
When you buy stock or shares in a company, you are considered an investor in that company, and hence you shall be entitled to a part of the company's earnings. This is why a stock investment is a long-term investment.
The longer you wait, the higher the payout shall be. You are advised to invest and forget about it, then 5-10 years later, you shall get to enjoy a passive income.
However, if you have a good amount of money for an initial investment, you can choose to invest in a company that is already doing well. These companies are listed in the NYSE – New York Stock Exchange. This is simply a market where company owners selling shares can be able to transact with potential customers.
Companies normally register to be part of the stock exchange, and once they are members, their share prices are listed for members of the public to buy.
Many people are skeptical about the stock market, and I'm guessing you have also heard some horror stories of someone who lost all, or a percentage of their investment in the stock market. Well, this is all true.
Investments are risky in nature, and you may succeed or fail, but it's always a good idea to take a risk.
So, the best advice I can give you is to seek the services of a professional when it comes to investing in stocks. There are investment companies that deal with the stock market. This is the best option if you have a sizeable income you wish to invest with.
You can also take time and do plenty of research in order to understand more about the stock market and how it works. Websites such as Investopedia contain plenty of information that you can glean some knowledge from.
You can also join M1 Finance to start your journey. M1 is a free investing platform that gives you the ability to build your portfolio and they help you manage it also for free.
Investing in real estate
Some of the richest people in the world started in real estate. Of course, we all know that this is where Donald Trump started, and hence, it is safe to say that Real Estate is a worthy investment.
Receiving money from a rental property every month is truly the best form of passive income. In fact, I think that you should strive to have as many rental properties as possible. This is the kind of investment that doesn’t require you to do any work on it, just rent the properties out and you can sit back and relax.
Now, one thing you should know is that real estate requires a sizeable investment on your part. Most of the real estate platforms will require that you have a net worth of around one million dollars or an annual income of $300,000.
This is definitely not feasible for most people that are just starting out, especially college kids.
There is however another alternative. Take a look at this website Fundrise. In this company, you can start your real estate business with an initial investment of just $500.
Sounds too good to be true? Well, here's how it works. When you give Fundrise your little money, they, in turn, invest it in real estate projects. Once these investments start making money, then, you will begin to see a return on your investment.
For people who are looking for a hands-off approach to real estate, which means that you do not want to deal with construction sites and tenants, then this would be a great option for you.
In 2015, investors who had made an investment with them were able to make at least 12% – 15% of their money without even lifting a finger. I mean, this has to be the actual definition of passive income.
There's more. What you will love most about Fundrise is that they use technology to research and identify real estate investments that are highly likely to earn them an income, and they ensure to keep off those that are likely not to. This should give you an assurance that they will not be playing around with your money.
Kindly log on to their website and learn more about this exciting investment opportunity, at Fundrise.
Peer-to-peer lending
This refers to lending money to people who do not qualify for traditional loans. This mode of investment is high-risk, but it is also characterized by high returns. Since you are the one lending, you can set your own interest rates.
It is worth to note however that if you are lending money to someone who doesn’t qualify for credit from a bank, they probably have a bad repayment history, and it's true what they say that “history repeats itself.” What I mean is, they are likely to default your loan as well.
So, how can you effectively get into the peer-to-peer lending game? It's very simple. Some companies help you do that. I will give you a list of these companies in a minute.
The only problem with these lending companies is that they are in business, and as such, their interest rates tend to be lower than what you would have set for yourself, and you must adhere to their rules. Other than that, they are safe and will be able to connect you to people who need the money and ensure that you are paid back with interest.
Let's look at a few;
Lending Club:
This company is a giant in the peer-to-peer lending industry, and as of March 2018, they had managed to disburse more than 35 million dollars. This goes to show that it is a trusted and reputable company that will help you make some passive income.
The minimum amount of money you can offer clients is $1,000 for individuals and $15,000 for businesses. The maximum is $40,000 and $300,000 respectively.
The interest rate on loans is 7%, and it is a good site to invest it. But, before you even consider doing this, you need to do enough research on the company, in order to understand them better, and the risks associated with such an investment. Start here.
Upstart:
This is a lending platform that offers loans to its clients for different reasons. They primarily wish to help you improve your life, and this includes helping you get out of debt, paying off your student loans, giving you capital to start a business, etc.
They normally rely on private investors to fund the loans. As an investor, you will make money from the interest given on the loan. You will not deal directly with the borrowers as all the loans are managed through Upstart.
Upstart offers loans at an interest rate of 8.85% and the least amount they offer is $1,000 while the maximum is $50,000.
It is extremely popular with young people who do not have a long credit history, and who may not be able to access loans from banks or other reputable lenders.
Funding Circle:
This is a UK based company that deals with small business owners. But it lends to people both in the US and UK. To date, Funding Circle has been able to lend over five billion loans to 40,000 businesses in the two countries.
They rely on investors to fund their business and if you want to invest with them, you can choose from two main categories; The low interest and low risk category that has an interest rate of between 4.3% – 4.7%, or the high risk and high yield category with an interest rate of 4.5% – 6.5%.
The high-risk businesses are those with a poor credit history with a possibility of default, but due to the fact that they are unable to get loans elsewhere, they accept the loan terms at a high-interest rate. The low-interest businesses have good credit; hence they pay less interest on loans.
Of course, you will want to lend your money at a high-interest rate, so you can get a high profit, but remember these are people with a history of default, so, tread carefully. I would advise you to lend with the low interest to people who have a good history of paying back loans, than lending at a high-interest rate to people likely not to pay back.
Prosper Marketplace
Prosper was the first ever peer-to-peer lending market, and it has grown tremendously over the years. It now boasts over 800,000 members and over twelve billion dollars loan disbursements.
They offer members a wide range of loans and they also help with loan consolidation and home improvement projects among others. The loans are offered from a minimum of $2,000 up to $40,000. The repayment terms are also flexible and they range from 3-5 years.
As an investor, you can join this company with only $25.
Money market funds and savings accounts with high yields
These investment options are some of the best passive income earners on this list. And they allow you the freedom of not thinking about your money at all.
I will explain these two in details so that you can understand them.
High yield savings account
This is a savings account available in most banks that has a high-interest rate. It is an account that is secured by the Federal Deposit Insurance Corporation – FDIC, an independent agency that was created by the US government and whose main purpose is to protect consumers while maintaining stability and public confidence.
Most banks that offer this feature will mostly have a minimum deposit amount, and most of them set this limit at $10,000. The annual percentage yield on your money will depend on the bank in which you are banking. Here are some options for you;
HSBC is an old bank, which means that it has been around for a long time. They have recently been making great strides in the US, and in fact, they are one of the banks with the best offer for a high yield savings account.
Their savings account also comes with no maintenance costs and a high-interest rate of 2.30% per annum.
This company is a new entrant into the market, and they have gained popularity due to their high yield savings account.
The account requires a minimum deposit of $10,000, but with it, you are able to get an APY of 2.45%. Their savings account is also FDIC insured.
The CIT bank's savings account is a top high yield saving account because they give you a good interest rate. Their platform is also very easy to use, and you can be able to sign up and start using their services immediately.
One of the coolest things about this bank is that you do not need a high deposit amount to start enjoying their 2.30% interest rate. They do not play any gimmicks with you; you will get to earn interest on the balance in your account.
If you are looking for a top-notch savings account, then Marcus by Goldman Sachs is the bank you have been looking for.
They are a modern kind of bank that will also offer you great advice on your investment. The current rate on the high-yield account is 2.15% APY.
Other banks that offer this kind of account are;
- SoFi Money – Their APY is 2.25%.
- Ally Bank – APY is 2.10%
- Synchrony Bank – APY is 2.25%
- Barclays Bank – APY is 2.20%
- Discover Bank – APY is 2.10%
- Aspiration – APY is 2.00%
Money market funds
There isn’t much of a difference between a money market funds and a high-yield savings account. They only differ in where each is located. A high-yield savings account is found in a bank, while a money market fund is found in an investment company, and they are rarely FDIC secured. But a money market fund will pay out a slightly higher interest rate compared to the high-yield savings account.
A few examples of these are;
This company is mostly known for its robo-advisor, but recently they launched a money market fund account.
Their APY is 2.57, and they do not charge any maintenance fee for this.
This company is known for its management tool in finance. They recently launched a money market fund which is doing very well and rapidly gaining popularity. Their current APY is 2.30%.
BBVA
This company is a top favorite because they have low minimum investment amounts and a high-interest payout. With BBVA, you can be able to make 2.00% APY.
It is, however, only available in the following states – TX, CA, CO, AZ, NM, AL, FL only.
CD Ladders
This is a strategy that is employed by smart investors. What they do is divide the amount of money they have into equal amounts and invest them in certificates of deposits (CDs). The CD's are then given different maturity dates. A strategy that helps decrease the investment risks.
Let me explain this further;
A certificate of deposit or CD is an investment product that offers you a fixed interest rate over a period of time. The funds invested are usually insured by the FDIC up to $250,000. The maturity dates are normally locked in at 3, 6 and 12 months, then, 1 year and 5 years.
The longer the period, the higher the interest. In order to take advantage of all the benefits associated with this investment option, investors use the CD ladder system.
A CD ladder is a strategy where the investors value their income and principal. In order for you to have a steady flow of income from CD's, what you do is give them different maturity periods, such that every other month, there is one maturing and giving you money.
In addition to having a regular income, you are also able to enjoy the benefits of a higher interest rate for longer maturity periods.
Here are the interest rates for different periods;
- 1 Year CD – 2.50%
- 2 Year CD – 2.90%
- 3 Year CD – 3.05%
- 4 Year CD – 3.10%
- 5 Year CD – 3.15%
Refinancing your mortgage
Refinancing your mortgage can be done through the process of Equity Release.
Buying a house is expensive, and most people take out a mortgage in order to cover this. A mortgage means that you cannot claim to own the house at its full value until you have paid off the whole amount. The value of what you own, however, i.e. what you have paid off already, is known as your equity.
Equity release is a financial product that is offered by most banks and it allows you to release some of the money that is yours in your home. Your home must, however, be valued again, in order for the lender to fully understand how much equity you are able to release.
This money, when released, can be issued as a lump sum amount, or you can receive it in several small amounts over a long period of time making it passive income.
Let’s explain this with an example. If, for example, you bought a house valued at $200,000, and you paid an initial deposit of 10% which equates to $20,000, you, therefore, own $20,000 of equity in the home. The remaining 90% of the home value is in the mortgage, which is the loan you pay for the home.
If you have built up some equity in your home you may wish to release some of it through taking out another mortgage. In order to release the equity in your home, you will need to look for some expert advice, either from your financial provider, the bank or equity release agents, who will advise you on the best way to get at your equity, and the ways it could help you.
How do you release the equity?
The idea is that you will keep paying for your home, and the more you pay, the more equity you have in the house. In a few years, if your home was still valued at $200,000, and you find that you have already paid an additional $10,000 then, your total equity will be $30,000. Releasing this equity can be done through the process of remortgaging. This is simply taking out a new loan on the same property.
If, however, you find that your home has increased in value to, let's say, $300,000, you can choose to look for another financier, from whom you borrow this amount. This allows you to pay off what remains of the initial loan ($170,000) which gives you $130,000 of equity which is yours to do whatever you wish with.
It is important to remember that you do not need to take the full amount of equity available in your home. You can simply take the amount you need and leave the remaining equity. Remember also that you can get more money from the same house over the years if you ever need it, so, it can be advisable not to take it all out at once.
Will the lenders give you the amount you want?
This will depend on the lender you are using. They will take time to evaluate you, and find out your current situation. If you are able to comfortably manage the repayments for your new mortgage, then they may be willing to refinance you, but if they feel you will struggle to keep up with the repayments, they may deny your loan request.
The rivalry between lenders may work in your favor however and it, therefore, pays to shop around and find a mortgage provider who is willing to give you the mortgage at a much lower interest rate. The lower the interest, the lower the monthly repayments, and the higher the savings on your part. Take your time finding a provider and do your research before agreeing to anything.
Is it the right decision?
If you have to tap into the equity that you already have in your home, then it is extremely important for you to first think critically about what you need the money for. There are many reasons why people release equity, such as;
To remodel their homes.
To upgrade or make improvements.
To start up a business venture.
To pay for another loan.
If your reason is different, it may be important to consider other, alternative sources of finance such as savings, because failing to keep up with repayments could put your home at risk, which makes equity release more potentially risky than some other types of loan. You could consider a personal loan instead. These types of loan are usually safer and cheaper when compared to the costs and risks of remortgaging.
The other catch to equity release is that although you are utilizing the equity already in your home, the lender must be repaid at some stage and that stage usually comes when the homeowner has died. This, therefore, means that if you take the equity out of your home, your home is no longer an asset that can be passed on as inheritance when you die.
Does it have a benefit?
We have talked about some of the limitations and risks to equity release, but there are some big benefits to remortgaging too. It is a great way to access significant amounts of money for large projects at a time when you need it, which can be crucial at some points in your life. Equity release allows you to stay in your home and keep hold of an asset, whilst also obtaining a lump sum of money.
You are more likely to be granted a remortgage than some other types of loan and thanks to competition in the remortgaging market, you may be able to take advantage of some very low-interest rates.
This, therefore, makes equity release a beneficial way to raise funds in the right circumstances. For those who do not intend to or are not able to leave a large estate for their heirs when they die, this can be a perfect solution when a large amount of money that you do not have in savings is required.
Conclusion
There are very many options for investments today. The above mentioned are some of the most popular that you should consider if you are serious about securing your money. The best I will have to say would be real estate because that is an investment that will never get old, neither will it run out. If anything, it will keep giving you over and over again.
The best thing you can do with your money is to invest it. Even as a student, you can still find investment options for you to invest in, and begin your journey to financial freedom. Also ensure to pay off your loans on time, and get rid of the high-interest loans as they will keep draining you.
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