Saturday, August 28, 2010

Top 4 Forms of Passive Income



There are limitless possibilities when it comes to generating passive income. Passive income is a way of earning income without actively trading your time for money. Conversely earned/active income is when your time is traded for money, like when we earn a wage or get paid a salary. We’re raised to believe that we should get an education, then get a secure job so we can earn an income. (For further information about the different types of income check out http://reynold-savemoney.blogspot.com/2010/07/rich-dad-lesson-3-types-of-income.html). Although, this is an excellent way of earning a living this is not the way the wealthy earn a living. The wealthy maximize their passive income streams. Passive income also comes with huge tax breaks, which is the biggest expense in life. Therefore, we should learn to maximize our passive income streams. Here are the top 4 ways of maximizing your passive income.

1) Stocks and Bonds – this form of passive income is also known as portfolio income. Depending on the stock you purchase you will be either paid a monthly or quarterly (every 3 months) dividend. This is to reward the shareholders for the risk they take holding the stock. There are some stocks that do not pay a dividend at all, these companies believe that they produce more value for their shareholders by reinvesting the money back into the company, hopefully leading to an increase in share price. Since we are talking about passive income it’s best to choose a stable company that pays out dividends on a regular consistent basis.

When a country or company is in need of money they can issue bonds which is a form of loan. I won't be getting into the details of bond trading today, since bond trading is a very complex topic. Basically they are seen as a much safer investment than stocks, however the returns are typically lower. Bonds pay monthly coupons which is the interest on the loan. For beginners who want to get into the bond market, you can start by purchasing some bond index mutual funds with low management fees at your local bank.

2) Invent Something – people who have patented inventions can make a fortune, if their invention sells well. This is easier said then done, however we all have had that aha! moment in our lives where we thought of a great idea. The trick is writing it down, designing, testing, building your invention, finding a patent lawyer and selling your idea. Also easier said then done (passive income sounds easy but can be quite challenging to earn). However, a lot of inventors have taken this route to maximize their passive income, like the guy who invented the pet rock. You can also think of writing a book. I know of one professor who wrote a mystery novel when he retired. Not sure if it’s selling, but if you love writing you can turn your ideas into a great read.

3) Rental Property – owning rental property is definitely one of the top ways of earning passive income. There are several ways you can get into the property game. Fire sales and foreclosures pop up often, where the original home owner cannot afford to make their payments. In these cases you can often get a great bargain on property. Renting property is not going to earn you a huge income as long as you have a mortgage on the property. However, over time you will own a huge asset. Your rental property can then be your collateral for a low interest loan to purchase more property! If the idea of dealing with tenants is already giving you a headache, you can hire a property manager (your rent may have to increase). For more on investing in property check out: http://reynold-savemoney.blogspot.com/2010/07/your-home-one-of-best-invesments-youll.html.

4) Build a Business – building a business can be a lot of work at first, but also very rewarding. Once the business system is set up you may not have to put as much time into it if you can hire a manager to take over the daily responsibilities. The Four Hour Work Week by Timothy Ferriss is an excellent book that talks about building efficient business systems (http://reynold-savemoney.blogspot.com/2010/07/4-hour-workweek.html). Another amazing read that will inspire you to become an entrepreneur is entitled Start Small Finish Big by Frank DeLuca who started the Subway franchise (http://reynold-savemoney.blogspot.com/2010/06/start-small.html).

I've included a video from our Rich Dad (Robert Kiyosaki) who briefly describes the different kinds of income.


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