Most people love the idea of retiring early. If you work hard and accumulate enough wealth, you can live off the interest and/or the income indefinitely. You don’t have to wait until you’re 65 to achieve this, either, especially if you harness the power of passive income.
Passive income streams are sources of revenue that don’t require you to take action to collect them. For example, traditional career paths aren’t passive streams of income, because you have to work a set number of hours or fulfill a set of obligations to collect your paycheck. Dividends from stocks, by contrast, will hit your bank account as long as you’re a stockholder—with no action required on your part.
So are passive income streams truly effective? And if so, how can you harness them to retire early?
The Problem With Self-Employed Retirement
Self-employed people generally don’t have an employer-sponsored retirement plan on which to rely. There are options like SIMPLE IRAs, and other individual retirement account plans, but these still require you to go out of your way to initiate and develop them. On top of that, you’re usually so focused on building your business and making income today, you’re not thinking about your future.
Passive income streams help you enormously, because they don’t require your full attention. They can also provide interest you can reinvest and compound, ongoing income to offset your expenses, or both, making them extremely versatile.
The “Myth” of Passive Income
Before we dig into examples of passive income streams, it’s important to realize the “myth” of passive income. The truth is, there’s no real way to make money with zero effort. Every income stream requires at least some upfront effort, whether it’s researching different asset types, managing your purchase, or establishing the assets necessary for your future growth.
That said, most of your effort will be spent initially; you’ll need education, training, setup, and optimization. From there, you’ll need some degree of maintenance and rebalancing, depending on the type of stream you’re using. But other than that, you’ll be collecting money passively—hence the slight misnomer.
Examples of Passive Income Streams
So what types of passive income can you develop for your future retirement?
- Real estate. One of the best options is real estate. If you buy an attractive rental property, you should be able to collect more in rent payments than you pay in ongoing expenses. You’ll have to scout for the right property and keep it in good condition, adhering to all local laws for landlords, but it’s typically well worth the effort. If you earn your real estate license online, you can find even better deals—before they get to the common market.
- Dividend-paying stocks. Some stocks issue regular dividends—sometimes equating to 4 percent of the stock’s value per year (or more). If you believe in the company issuing the stock, this can be a reliable and high-yield way to make extra money. And if you’re interested in hedging risk further, you can expose yourself to many dividend-paying stocks in an ETF.
- Peer lending. Peer lending sites allow you to lend money to other people. You’ll generally earn a higher interest rate for lending to people with lower credit scores, but as you can imagine, lower credit scores are riskier.
- Copyrighted content. You may also be able to make money by developing and selling copyrightable content. Depending on your skillset and interests, that could mean taking stock photos, writing background music, or developing how-to guides and coursework.
- Affiliate marketing. If you have a successful blog (or want to create one from scratch), you can use affiliate links to generate income based on the number of sales you initiate. It’s easy to get into an affiliate marketing campaign, and if you can generate a reliable stream of traffic, it can be very profitable.
- Automated services. Certain types of businesses, like laundromats and car washes, are ideal for generating income because they’re almost entirely automated.
- Annuities. As you get older, you may consider purchasing an annuity, which will guarantee you a certain amount of fixed income for life.
Diversifying Income Streams
One of the best things you can do is diversify your income streams, like diversifying your portfolio. This will protect you from a variety of risks. If one income source becomes unavailable or begins to dry up, you’ll have plenty of other options to utilize. If you stack multiple income streams on top of each other, you’ll maximize your potential revenue. Try to accumulate as many income streams as you can feasibly manage.
With passive income, any self-employed individual can retire faster, retire wealthier, or both. You just have to choose the right income streams for your goals, and optimize them for growth.