A basic definition of passive income for the masses is regular income generated with little effort required. Sign me up right?! Who wouldn’t want to generate regular income with little effort? Most people already are doing so by holding money in traditional savings accounts, but perhaps it is time we start to rethink our strategy.
I am generating regular income with over 17% annual return on my investment and today I am going to tell you how I did this.
Think of what you could do with that type of rate of return. Invest $1,000 and you have $170 return after 1 year. Invest $5,000 and you will have an additional $850. Sounds like some great vacation money doesn’t it? Do you know what happens if you invest $10,000 and continue to reinvest that money for the next 5 years?
$10,000 initial investment
$11,700 after 1 year
$13,689 after 2 years
$16,016 after 3 years
$18,738 after 4 years
$21,924 after 5 years, more than double your initial investment!
Now lets take a look at what you get with a traditional savings account with the same investment. Based on a February Moolamoney article
a great annual rate of return would be 1.05% and even then you need to have a balance of > $25,000. Lets disregard that restriction for simplicity and crunch the numbers:
10000 initial investment
10105 after 1 year
10211 after 2 years
10318 after 3 years
10426 after 4 years
10535 after 5 years, you have loaned the bank $10k and all they are giving you for that is $535 after 5 years?
Why are we letting the banks borrow our money for at most 1/4 of the rates they charge us to borrow?
Now its time for you to determine the best approach for you to generate passive income.
There are a few things to consider when you plan out your passive income portfolio.
Here are just a few.
1. What is your comfort level with risk?
2. How much money do you have to invest?
3. How much time do you want to invest?
4. How fast will you need to monetize your investment?
Once you have answered these questions then you can start looking at passive income opportunities. Here I will provide you my answers to these questions as an example. These answers are real and not made up.
1. What is your comfort level with risk? Not a very high comfort level.
2. How much money do you have to invest? Based on number 1 I determined that I will initially start with $500.
3. Length of time you want to hold investment? Since this was my attempt at dropping my savings account this will be more than a year but probably less than the years I have until retirement. I also want to avoid significant penalties or taxes for getting out of the investment early(if there was a restriction).
4. How fast will you need to monetize your investment? Not fast at first since this was a trial investment that may be used to make a larger investment elsewhere therefore I did not want it to be tied up too long.
My comfort level with risk pushed me away from day trading, gambling, and other such investments. My low initial investment pushed me away from real estate. My Length of time for holding ruled out 401k’s and retirement investments as did my speed for monetization.
It came down to two investment options for me, a CD ladder, like the one detailed over at PT Money, or peer to peer lending. Based on all this information I went with peer to peer lending.
With this information in hand you can now approach your investment options and make some self informed decisions. Do your research on all options and see if you too can dump your savings account for something more attractive and create a greater source of passive income.
If you found that this was helpful and are interested in receiving free updates with useful information and special offers, please sign up for my email newsletter below.
Disclaimer: Of course I can’t guarantee the same rate of return on your investments. I am not a financial advisor, I am simply someone that does a lot of research and is willing to try things out to see what will work for me.