Passive Income: A Few Options

Part Two of Three

In Part 1 of this series, we defined passive income as money received on a regular basis that only requires a little time or effort after the initial set-up. Now, we’ll look at specific examples of passive income to help you determine which might fit best with your situation and goals. Let’s get into it!

Interest on a savings account or certificate of deposit (CD)

Description
A financial institution pays you a small amount of money at regular intervals or at the end of a defined period to keep your funds in an account.

Risk Level
The risk is very low; savings accounts and CDs at banks and credit unions are insured up to $250,000 per person per account as long as the financial institution is a member with the FDIC (for banks) or NCUA (for credit unions).

Possible Return
The trade-off for the low risk is that the returns are relatively small. The average rate on a savings account at the time of this writing is 0.2% yearly. The average yield for a one-year CD is currently 1.64%.

Initial Investment Size
The amount is flexible and can be small if necessary.

Liquidity
Most savings accounts allow you to access your money whenever you want. Since CDs are designed to pay your yield after a pre-determined period, if you withdraw the money early, you will face penalties.

Work Required
With the ability to do transactions online, the investment of time and labor is minimal. There is very little ongoing effort necessary.

Skillsets Needed
A basic understanding of financial transactions and patience will help.

Other Possible Pros
CD laddering is a strategy that can allow you to realize greater liquidity for your funds by splitting up your money among CDs with different maturity dates rather than putting all your money in one CD.

Other Possible Cons:
Because the return on savings accounts and CDs is relatively low, you might miss out on higher returns from other investments.

Interest from a bond investment

Description
A bond is a debt investment in which an organization, like a corporation or government, issues an IOU to pay back the money you have lent them after a certain amount of time with a fixed or variable amount of income tacked on to the repayment.

Risk Level
While they are generally considered to be on the safer end of the investment spectrum, bonds can carry some risk of not receiving the return you expected. As with any investment, it’s exceedingly important to thoroughly research the possible dangers of committing your money.

Possible Return
Because of the variability within the bond investment class, it is difficult to put one number to the returns that bonds tend to produce. However, historically, bonds have been seen as yielding greater returns than savings accounts but less than stocks.

Initial Investment Size
Individual bonds typically start at $1,000, but bond funds can be invested in for far less and can give you the benefit of diversification.

Liquidity
Bonds are considered liquid assets because they can easily be bought and sold.

Work Required
As mentioned, much research is necessary to understand the intricacies of bond investing.

Skillsets Needed
Since we’re talking about passive income, we’ll assume you won’t actively trade bonds but instead buy individual bonds or funds relatively infrequently. With that being the case, the main traits necessary will center around your ability to gather data on your options and make prudent choices based on that information.

Other Possible Pros
Bonds offer a fixed return, are generally less risky than stocks, and come with a rating based on their risk level, so you have some idea of your investment’s potential downsides.

Other Possible Cons
Bonds usually offer less return than stocks and are riskier than savings accounts.

Money market fund

Description
Money market funds are fixed-income investment products comprised of debt securities like US Treasury bills or unsecured debts from corporations or banks.

Risk Level
Money market funds are considered relatively low-risk relative to other investment options.

Possible Return
At the time of this writing, the average money market account earns 0.23% Annual Percentage Yield according to the FDIC.

Initial Investment Size
Money market fund investments can start at $1,000, but the minimum investment may be much higher depending on the fund.

Liquidity
Money market funds are considered highly liquid.

Work Required
As with all investments, performing copious amounts of research is essential to understand what you’re embarking on.

Skillsets Needed
To succeed in investing in money market funds, you’ll need to perform a lot of analysis of the available options.

Other Possible Pros
Money market investing is generally considered a low-risk way to diversify a portfolio.

Other Possible Cons
Low returns and a lack of insurance for the invested amounts mean this type of investing is not the best option for many people.

Cash back on a debit or credit card

Description
Some debit or credit card issuers provide a specific percentage payment on your purchases as a cash-back reward.

Risk Level
The main risk is getting caught up in overspending because you’re too focused on the cash back you’ll receive, causing a net negative for your bottom line.

Possible Return
Most cards fall in the 1-2% range, though it’s important to understand that some cards change the amount of cash back you get based on the type of purchase.

Initial Investment Size
It’s often possible to find cash-back cards with no initial fee, though it’s important to ensure you understand the fee structure not only at the beginning of your time as a cardholder but on an ongoing basis.

Liquidity
Liquidity is a non-issue since no deposit is typically tied to cash rewards cards.

Work Required
Researching cash rewards cards isn’t too laborious. Talking with your financial institution is a good start.

Skillsets Needed
Money management abilities will go a long way toward ensuring your experience with a cash-back card is positive. Discipline is also crucial to avoid overspending merely to get more cash back.

Other Possible Pros
Cash-back cards can be an excellent tool for generating passive income because they pay you for doing something you were doing anyway: buying stuff. Debit and credit cards, in general, offer a great deal of ease of use and flexibility. Using a credit card has the added advantage of helping you build a positive credit score as long as you make payments on time, keep your balances relatively low and keep the card open long-term.

Other Possible Cons
If the ease and flexibility mentioned above cause you to overspend, you might be better off using cash.

Renting out a home, apartment, or room

Description
Tenants pay you to live in a property you own.

Risk Level
If you haven’t bought the property yet, there is always a certain amount of risk associated with purchasing such a large asset. For example, what if you buy a home only to later have it condemned? If you already own a property, there is a risk the tenants will cause extensive damage. However, millions of Americans own property and navigate these kinds of risks every day.

Possible Return
With so much diversity within this category, it’s impossible to put any average return to taking on tenants. However, as mentioned above, millions of Americans own rental properties, and there’s a reason why this option has been so attractive historically.

Initial Investment Size
Again, there is a broad range here, but keep in mind that buying a rental property usually takes a 15-25% down payment.

Liquidity
Real estate is considered an illiquid asset due to the difficulties in selling a property quickly.

Work Required
This is one of the types of passive income requiring the most work. From researching the real estate market to upkeep on the property to dealing with many annoying tasks, the time commitment should not be underestimated. It is possible to hire someone to help with a lot of the work once you have invested in a property but keep in mind the extent to which that will eat into your profits.

Skillsets Needed
Research abilities, analytical skills, resilience, and attention to detail will be helpful regardless of your rental situation.

Other Possible Pros
Buying a rental property can be an excellent long-term investment because it can continue to earn you and your family income for years or even decades. There can also be certain tax advantages to owning property.

Other Possible Cons
In addition to the factors mentioned above, fluctuations in the real estate market and the area in which you buy can significantly affect the value of your property. Unlike some more conservative investments, the risk can be far greater with owning real estate.

That should give you some fuel to get the ideas for passive income percolating. In the third and final installment of our series on passive income, we’ll look at a few more ideas for getting the money flowing in without having to break your back to do it.