Investing your money is one of the smartest financial moves you can make. While you can earn a good paycheck from working, investing puts your money to work for you. You can maximize your money exponentially and reach your financial goals much faster.
Many people have learned how to earn and save money, but very few have learned how to acquire, make, and build wealth. In order to build wealth, you must invest in different forms of passive income.
What is Passive Income?
Passive income is money that you don’t have to work for actively. Sure, you have to learn about the different forms of passive income, create the system, and monitor your investments. However, the money you make on the back end far outweighs the effort you put into the front end. The best way to understand passive income is through something I like to call The Law of Income.
The Law of Income
Let’s say you work at a job and don’t receive your paycheck. If you have common sense, you’ll go to your boss and say, “Show me the money!”
People don’t expect their investments to pay them the same way. They invest in what they don’t understand and hope for the best. To abide by The Law of Income, you must know how and when an investment will pay you before you decide to add it to your portfolio.
If you invest in stocks, you have to sell them to get paid (unless they’re dividend-producing stocks.) If you invest in an IRA, you’ll need to wait until you’re 59 1/2 to take your gains. The key is to balance long-term investments with short-term ones. If all your investments don’t pay you for several decades, you’ll miss opportunities because you won’t make enough passive income to stay in the game.
The most common way that wealth has been built in western nations is through a combination of business and real estate passive income streams. Entrepreneurs will build a business and use the profits to purchase real estate. Sometimes they go straight into creating a real estate business. However, that’s not the only way to do it. Some people live entirely off of paper assets, and others who earn high levels of income through royalties from their books. Regardless of your means, the important thing is to learn how to invest in a way that produces annual, quarterly, and monthly returns.
First and foremost, you must invest in yourself and find out what works for you. You don’t have to know everything about everything, but you need to know at least something about two forms of passive income. Here are six time-tested forms of passive income that can help you build wealth.
6 Forms of Passive Income
1. Rent from real estate
Real estate is one of my favorite forms of passive income. There are several real estate strategies, but the buy and hold approach is the best way to get a recurring revenue stream. Here’s how it works: you purchase a property and rent it out to a tenant. Through their rent, the tenant pays for your asset every month. The goal is to purchase a property that can generate rent above and beyond your mortgage, insurance, taxes, and maintenance. I like to cash flow at least $300 per month. That’s $3,600 per property, per year.
2. Profits from a business [not a salary]
Every entrepreneur knows that the salary you pay yourself from your business is not passive income…you work hard for that money! The passive income comes in the form of profits from your business. In the United States, these are also called capital distributions. (A capital distribution is the payment of money or property to business owners based on their ownership.)
Passive income is created when the products or services you created several years ago are still bringing a healthy cash flow. It is also created when you move from being a doer to a leader in your business. The key here is passive–if the money you’re making from your business is directly proportional to your time, it’s not passive.
3. Dividends from stock
When most people think about the stock market, they consider buying and selling. Whereas it’s great to have some of these in your portfolio, true passive income occurs when you get to keep the asset and make a profit from it at the same time. Dividend-paying stocks will typically pay you on a quarterly or semiannual basis.
You can purchase dividend-paying stocks through a brokerage account through a registered investment adviser. We recommend finding biblically-responsible stocks that align with your values.
4. Interest from bonds and CDs
Given the right environment, bonds and CDs (a Certificate of Deposit) can be safe, liquid forms of passive income. When you purchase a CD, you are loaning money to the bank for a specified amount of time in exchange for interest. A bond is similar, except you’re typically loaning money to the government or a business.
The interest rate on a CD is typically the annual percentage yield (APY). However, many banks compound interest monthly. Some CDs allow you to take the monthly interest out rather than compounding it.
Bonds pay out periodic interest payments known as coupons quarterly, bi-annually, or annually. When the bond term is up (known as maturity), the principle is returned to the investor.
5. Royalties from intellectual property
Are you the creative type? Whether you view yourself as a writer or composer, the truth is that royalties can be made in almost any industry. When I was a pastor, royalties from cassette tapes with my teachings completely replaced my income!
In essence, royalties are agreements or licenses that explain how a third-party can use the intellectual property of someone else for a fee. Types of royalties include books, songs, patents, and digital content.
6. Royalties from oil, gas, or minerals
It’s smart to invest in commodities that people will always use regardless of the economy. Investing in oil, gas, and minerals are great forms of passive income that provide royalties without having to bear the costs of extracting the resources. You can hold these investments in an IRA or contact the company directly.
I hope these forms of passive income have empowered you to make money through investing on a monthly, quarterly, and yearly basis. The more you learn and invest, the sooner your passive income will exceed your earned income, and you’ll be financially free. Questions or comments? Please share them below!