Some folks might try to tell you that the concept of passive income is nothing more than a fantasy, but that's simply not true.
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It's very possible to put yourself in a position where you have a constant flow of income without having to actively make money every month. In fact, a recent report from First National Bank of Omaha found that more than half of all Americans have at least one source of passive income.
Let's be realistic about the passive income we can earn, and understand the pros and cons of each option. Here are a few choices you might want to consider to help achieve your financial objectives.
1. A CD ladder
What's great about certificates of deposit (CDs) is they can give you a fairly sizable return on your investment without you ever having to worry too much about losing your money. Your deposits are safeguarded up to $250,000 per individual per bank, if you bank with an FDIC-insured institution.
A CD ladder is more desirable than a single CD because it provides greater flexibility. By dividing your money among several CDs with varied expiration dates, you'll be less likely to face an early withdrawal fine if you need quick access to your funds, one of the downsides of opening a CD.
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To give you an example of what a CD ladder might pay you, let's say you invest a total of $1,000 in five certificates of deposit with the following interest rates:
- 12 months at 4%
- 24 months at 3.6%
- 36 months at 3.6%
- 48 months at 3.55%
- 60 months at 3.5%
In total, you'll be bringing in $563 that you don't have to work for.
2. A stock portfolio
A stock portfolio can be a great source of passive income for several reasons. First, if you've invested in dividend stocks, you can look forward to receiving income every quarter. It's worth noting, companies that issue stocks aren't legally required to pay dividends. However, those that do choose to pay them tend to make an effort to maintain that practice.
Say you own $5,000 worth of dividend stocks. At a 3% dividend yield, you'd receive around $150 in passive income per year. However, that amount could potentially be higher in the long run because the value of your shares could increase over time, and the companies you're invested in may choose to raise their dividends, which is a common practice for many companies.
Another way to earn passive income from your stock portfolio is to hold onto your stocks for many years and let them grow in value. If you want an even simpler approach, consider buying shares in an S&P 500 ETF, which can track the performance of the market.
Over the past 50 years, the S&P 500's typical annual return has been 10%. Let's say you invest $5,000 in an S&P 500 ETF today. In 20 years, your investment could potentially reach around $33,600 (assuming the same return rate).
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3. An investment property
Purchasing an investment property can be an excellent way to earn passive income. If you can afford to buy a property and locate one in a sought-after neighborhood, you may be able to collect a respectable amount of rent - and increase it over time. Alternatively, you could purchase an investment property to rent out on a short-term basis via a platform like Airbnb.
That being said, there are some potential downsides to investing in property. For one, there's a significant amount of work involved. You can hire a property manager to handle the tasks, which would qualify as true passive income, but doing so would also eat into your profit margins.
Owning physical real estate comes with some risks. When something breaks, the cost of fixing it is yours to pay, and there's no guarantee that you'll have a steady stream of tenants to help cover those costs. So, you'll need to consider whether an investment property is a good fit for you.
The beauty of earning passive income lies in its potential to generate a steady stream of earnings over time. One may not become rich overnight, but starting early can lead to significant long-term gains.
