Top 5 Types of Passive Income
Anyone who has dreams of financial freedom and security has heard of passive income. There are many types of passive income - money that you earn without directly working. This is the best type of income, since you don’t need to physically spend time earning it.
If you go to a 9-5 and earn a certain amount for each hour of work you do, that’s not passive income. In fact, that’s quite the opposite - and something you eventually should want to get away from. Instead of focusing on hourly wages, take a look at the top 5 types of passive income:
- Dividends - One of the best, most consistent forms of passive income. Dividend-paying stocks are generally about as rock-solid as you can get in the stock market, and pay consistent dividends. This is almost-guaranteed money.
- Capital Gains - While not passive income in the same sense that dividends are, I still include it here. Whether you’re watching the ticker or not, your stocks are ( potentially ) increasing in value over time.
- Real Estate Cash Flow - If you own real estate and currently have tenants, you should have some sort of positive cash flow. This is mostly hands-off - you get that income regardless.
- Equity Growth - Month after month, year after year, your investment real estate grows in value. The longer you hold it ( barring bubbles / bad market conditions ), the more equity you gain.
- Blogging Income - Some will argue and say that blogging isn’t exactly passive. It is and it isn’t. There’s certainly quite a lot of work involved - the posts don’t write or promote themselves. However, advertising revenues still tick upwards whether I’m writing a post, at my day job, eating dinner, or taking a nap. I’ll consider that to be passive.
There is a finite amount of time in the day. There are only so many hours that you can work at a day job and earn an hourly wage. Eventually you will run into a wall that you cannot pass - there is no more time in the day. The way to climb that wall and move forward is with passive income. The more streams of passive income you can build, the further you can move in your financial life. Whether at retirement time or ( hopefully ) years before, you want to be able to rely solely on your passive income. Imagine all the free time you would have if you didn’t need to work a day job anymore.
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April 10th, 2008 at 9:45 am
I would argue that real estate cash flow isn’t passive income. Sure it’s a lot less work than a day job, but you still have to do some work to get it. Blogging income isn’t either, but non-blog internet income defintely can be. I have a site I spent about 30 hours setting up 3 years ago that still earns me $3-4 per day. I haven’t touched it since, although I’m planning on going back and doing some addition article marketing for it since the conversion rates are relatively high. Dividend income is my favorite form of passive income because it’s currently taxed at a lower rate.
April 10th, 2008 at 11:42 am
I guess it really depends on your definition of passive income. To me it’s when I’m not trading time for money directly - in the $x for x hours of time scenario. Sure, you will spend time managing your property, but it ( theoretically ) grows in value all day long, every day. Same thing with blogging. It takes time, but the earnings ( again theoretically ) grow exponentially, and continue whether you are awake or asleep. If you take a week off, you still earn money.
Dividends are definitely fantastic, and require the least maintenance of the group.
April 10th, 2008 at 1:32 pm
What a coincidence, I talk about another type of passive income in my blog too.(shameless plug!)
I would like to get into dividend and real estate income eventually. I’m kind of hesitant with real estate though because of the large amount in startup costs and the headaches that can come your way from being a landlord. Plus depnding on how much the mortgage is versus rent, you may need multiple properties before you start seeing real money. The problems associated with it are still there, but they start stacking, and that is a type of compounding of compounding I can do without.
Oh well, nothing ventured nothing gained right?
April 10th, 2008 at 2:52 pm
One more source of passive income - high interest money market or saving accounts like Vanguard ING, HSBC etc. They pay low rates right now (about 3%), buy my emergency fund (around $30K) earns me about $100 per/month without having to do anything. Ie Passive Income.
And yet one more, is cash back from credit cards. I did a recent post on my AMEX cash back, which return 5% on my regular spending. I would classify this as passive - but risky if you are not good at paying on time.
April 10th, 2008 at 3:31 pm
Good point Andy - I completely forgot money market accounts / online savings. BTW congrats on having such a hefty emergency fund.
April 10th, 2008 at 6:20 pm
I know a guy who just dumped 4 units…In no way was that real estate passive income for him. Perhaps it was the area, but it just seemed like he had to babysit his tenants. He had to constantly remind them rent was due, they were always breaking things in his units, and vandals in the neighborhood cost him alot of time and money.
My blog has a post exactly on this topic, titled Rental Property Really Doesn’t Bring Passive Income.
Tim
April 11th, 2008 at 8:38 am
You bring up a good point Tim. With that sort of thing in mind, I would restrict my rental property purchases ( when I am ready to move forward ) to areas that are less likely to be full of vandals / druggies / criminals. Yes, it will cost more in startup capital, and the returns may not be as stellar. But I think that the headaches will be infinitely less, and that is worth the trade-off.